[Federal Register Volume 65, Number 16 (Tuesday, January 25, 2000)]
[Rules and Regulations]
[Pages 3820-3843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1380]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8865]
RIN 1545-AS77


Amortization of Intangible Property

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Final regulations.

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SUMMARY:  This document contains final regulations relating to the 
amortization of certain intangible property. The final regulations 
reflect changes to the law made by the Omnibus Budget Reconciliation 
Act of 1993 (OBRA '93) and affect taxpayers who acquired intangible 
property after August 10, 1993, or made a retroactive election to apply 
OBRA '93 to intangibles acquired after July 25, 1991.


DATES:  Effective Date: January 25, 2000.
    Applicability Dates: These regulations apply to property acquired 
after January 25, 2000. Regulations to implement section 197(e)(4)(D) 
are applicable August 11, 1993, for property acquired after August 10, 
1993 (or July 26, 1991, for property acquired after July 25, 1991, if a 
valid retroactive election has been made under Sec. 1.197-1T).

FOR FURTHER INFORMATION CONTACT:  John Huffman at (202) 622-3110 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and, pending receipt and evaluation of public 
comments, approved by the Office of Management and Budget (OMB) under 
44 U.S.C. 3507 and assigned control number 1545-1671.

[[Page 3821]]

    The collection of information in this regulation is in Sec. 1.197-
2(h)(9). This information is required in order to provide guidance on 
the time and manner of making the election under section 197(f)(9)(B). 
Under this election, the seller of a section 197 intangible may pay a 
tax on the sale in order to avoid the application of the anti-churning 
rules of section 197(f)(9) to the purchaser. This information will be 
used to confirm the parties to the transaction, calculate any 
additional tax due, and notify the purchaser of the seller's election. 
The likely respondents are business or other for-profit institutions.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. 
Comments on the collection of information should be received by March 
27, 2000. Comments are specifically requested concerning:
    Whether the collection of information is necessary for the proper 
performance of the functions of the Internal Revenue Service, including 
whether the information will have practical utility;
    The accuracy of the estimated burden associated with the collection 
of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the collection of information may 
be minimized, including through the application of automated collection 
techniques or other forms of information technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Estimated total annual reporting burden: 1500 hours.
    Estimated average annual burden hours per respondent varies from 2 
to 4 hours, depending on individual circumstances, with an estimated 
average of 3 hours.
    Estimated number of respondents: 500 per year.
    Estimated annual frequency of responses: 1.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to this collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On January 16, 1997, the IRS published proposed regulations (REG-
209709-94) in the Federal Register (62 FR 2336) inviting comments under 
sections 167(f) and 197. A public hearing was held May 15, 1997. 
Numerous comments have been received. After consideration of all the 
comments, the proposed regulations are adopted as revised by this 
Treasury decision.

Explanation of Provisions

Section 162(k) Application

    Example 4 of the proposed regulation Sec. 1.197-2(k) provided that 
amounts paid for a covenant not to compete entered into in connection 
with a redemption was nondeductible under section 162(k) and thus not 
subject to section 197. Commentators suggested that guidance on the 
application of section 162(k) to transactions involving section 197 
intangibles should be addressed in regulations under section 162(k). No 
reference to section 162(k) is made in the final regulations.

Purchase of a Trade or Business

    Certain intangibles are excepted from the application of section 
197 if they are not acquired as part of a purchase of a trade or 
business. The proposed regulations provide that, for purposes of 
section 197, a group of assets constitutes a trade or business if their 
use would constitute a trade or business under section 1060 (that is, 
if goodwill or going concern value could, under any circumstances, 
attach to the assets).
    In addition, the proposed regulations treat a group of assets as a 
trade or business if they include any customer-based intangibles or, 
with certain exceptions, any franchise, trademark, or trade name (the 
per se rules). The preamble of the proposed regulations state that the 
IRS intends to provide additional guidance on the circumstances in 
which a group of assets is treated as a trade or business in 
regulations under section 1060.
    Although a number of comments requested that the final regulations 
under section 197 provide such additional guidance, the final 
regulations generally retain, without amplification, the rules in the 
proposed regulations. The IRS and Treasury Department will, however, 
continue to consider this issue during the development of final 
regulations under section 1060.
    Commentators also requested modifications to the per se rules. In 
response to these comments, the final regulations limit the 
applicability of these rules to the cases specifically described in the 
legislative history of section 197 (that is, the acquisition of a 
franchise, trademark, or trade name). The final regulations retain the 
proposed exceptions under which certain franchises, trademarks, and 
trade names are disregarded in applying the per se rules. In addition, 
the regulations clarify that a license of a trademark or trade name is 
also disregarded in applying the per se rules.

Computer Software

    The final regulations contain rules that supersede certain of the 
procedures set forth in Revenue Procedure 69-21 (1969-2 C.B. 303), 
which provides guidelines relating to costs incurred to develop, 
purchase, or lease computer software. Specifically, the final 
regulations provide that purchased computer software is amortizable 
over 15 years if section 197 applies and over 36 months if the software 
is not a section 197 intangible. In addition, the regulations clarify 
that section 197 (rather than Sec. 1.162-11) applies to certain costs 
incurred with respect to leased software (that is, costs to acquire a 
section 197 intangible that is a limited interest in software). 
Computer software costs included, without being separately stated, in 
the cost of the computer hardware (bundled software) continue to be 
capitalized and depreciated as part of the computer hardware. In 
addition, the final regulations treat software costs as currently 
deductible (and not subject to section 197) if they are not chargeable 
to capital account under the rules applicable to licensing transactions 
(discussed below) and are otherwise currently deductible. The final 
regulations clarify that, for this purpose, an amount described in 
Sec. 1.162-11 is not currently deductible if, without regard to 
Sec. 1.162-11, such amount is properly chargeable to capital account. A 
proper and consistent practice of taking software costs into account 
under Sec. 1.162-11 may, however, be continued if the costs are not 
subject to section 197.
    A revenue procedure superseding Rev. Proc. 69-21 and providing 
procedures consistent with the rules in the final regulations will be 
issued in the near future. In the meantime, taxpayers may not rely on 
the

[[Page 3822]]

procedures in Rev. Proc. 69-21 to the extent they are inconsistent with 
section 167(f), section 197, or the final regulations.

Mortgage Servicing Rights

    The proposed regulations treat mortgage servicing rights relating 
to a pool of mortgages as a single asset under section 167(f) (relating 
to mortgage servicing rights not acquired as part of a purchase of a 
trade or business). Thus, if some but not all mortgages in a pool 
prepay, no loss is recognized. Commentators assert that each right in 
the pool is a discrete asset, and thus, taxpayers should be able to 
recognize a loss upon the prepayment of an individual mortgage within 
the pool. The Service and the Treasury Department believe this is 
generally inappropriate in cases where depreciation is based on the 
average useful life of the assets. See Sec. 1.167(a)-8. Thus, the 
regulations retain the rule that no loss is recognized if some but not 
all mortgages in a pool prepay or are sold or exchanged. The final 
regulations provide, however, that if a taxpayer establishes multiple 
accounts within a pool at the time of its acquisition, gain or loss is 
recognized on the sale or exchange of all mortgage servicing rights 
within any such account.

When Section 197 Amortization Begins

    The proposed regulations provide that amortization begins the later 
of the first day of the month in which the property is acquired, or the 
first month in which the active conduct of a trade or business begins. 
Commentators suggest that the literal language of section 197(a) allows 
amortization beginning with the month the intangible is acquired. Under 
section 197(c)(1), however, a section 197 intangible is amortizable 
only if it is held in connection with the conduct of a trade or 
business or an activity described in section 212. Moreover, there is no 
suggestion in the legislative history that Congress intended to apply a 
rule differing from those applicable under section 167 and former 
section 1253(d).
    Former section 1253(d)(2) provided, in language similar to that in 
section 197(a), that the amortization of certain amounts begins in the 
taxable year in which the amounts are paid. Although section 1253(d)(2) 
did not contain any reference to section 162 or to use in a trade or 
business, it was nevertheless well established at the time of the 
enactment of section 197 that the provision embodied a trade or 
business requirement and that amounts were not deductible thereunder 
unless the taxpayer was operating or conducting a trade or business 
after the amounts were paid.
    Commentators suggest that it is significant that section 167 refers 
to ``property used in the trade or business'' while property can 
qualify for amortization under section 197 if it is ``held in 
connection with the conduct of a trade or business.'' Further, 
commentators assert that the language used in section 197 is closer to 
the ``held in connection with his trade or business'' language used in 
section 174, which does not require the current conduct of a trade or 
business, than to the language of section 167. The different language 
used in these provisions can be explained, however, without departing 
from previous practice under sections 167 and 1253(d) regarding the 
time at which amortization commences. Broader language under section 
197 is necessary because it applies to assets, such as goodwill, that 
although held in connection with the conduct of a trade or business are 
not commonly viewed as being used in the trade or business. Further, 
modifying the language used in section 174 by adding the words 
``conduct of'' indicates that Congress did not intend to change the 
longstanding trade or business requirement for purposes of determining 
when amortization commences.
    Consequently, the final regulations retain the rule in the proposed 
regulations that amortization begins no earlier than the first day of 
the month in which the active trade or business or the activity 
described in section 212 begins.

Transactions Involving Partnerships

    The final regulations relating to partnership transactions have 
been changed from the proposed regulations in several respects to 
reflect the recommendations of commentators. Example 17 of the proposed 
regulation Sec. 1.197-2(k) provided that a partner may amortize a 
Sec. 743 adjustment with respect to a section 197 intangible only if 
the formation of the partnership and the sale of the partnership 
interest are ``unrelated transactions.'' Commentators suggested that an 
unrelated transaction standard would create significant confusion for 
taxpayers. According to the commentators, taxpayers would have greater 
certainty with respect to their transactions, and the government still 
would be adequately protected, if these transactions were analyzed 
under general tax principles, including the step transaction doctrine. 
The final regulations remove the unrelated transaction requirement. 
However, if the transaction is structured so that, under general 
principles of tax law, the transaction is not properly characterized as 
a sale of a partnership interest, then section 197 will apply to the 
transaction as recast to reflect its true economic substance.
    Certain commentators also requested that Example 16 of proposed 
regulation Sec. 1.197-2(k) be modified to allow a partnership to 
amortize an intangible contributed to the partnership under the 
transferred basis rules under section 197(f)(2), even if a partner 
related to the partnership under section 197(f)(9)(C) had owned the 
intangible during the transition period and, as part of an integrated 
transaction, had sold the intangible to an unrelated party before 
forming the partnership. The commentators suggested that because 
section 197(f)(9)(E) generally permits amortization for the stepped-up 
basis in a partnership transaction under section 743 where a section 
754 election was in effect, amortization also should be allowed in a 
sale of an intangible followed by a contribution of the intangible to a 
partnership, an economically similar transaction. This recommendation 
was not adopted. In general, a partnership is treated as an entity 
separate from its partners in characterizing related party transfers. 
See, e.g., Section 707(b)(1) (specifically referenced in section 
197(f)(9)(C)(i)(I)). Section 197(f)(9)(E) does provide a special anti-
churning rule for certain partnership transactions. However, this 
special rule is not applicable in situations where a partnership has a 
transferred basis in the intangible under section 723. With respect to 
the analogy under section 743, where a transferee is allowed to 
amortize a section 743 basis step-up, it is only the increase in basis 
that may be amortized, and the amortization attributable to the basis 
increase is segregated for use only by the transferee partner. Neither 
of these results necessarily follow from a sale of property followed by 
a contribution of the property to the partnership.
    The proposed regulations did not allow partners to deduct, for 
federal income tax purposes, curative or remedial amortization 
allocations from the partnership in situations where the asset was a 
section 197(f)(9) intangible (and thus nonamortizable) in the hands of 
the contributing partner. Commentators have suggested allowing curative 
and remedial allocations under section 704(c). The final regulations 
generally permit a partnership to make curative or remedial allocations 
to its noncontributing partners of amortization relating to an asset 
that was amortizable (or a zero-basis intangible that otherwise would 
have

[[Page 3823]]

been amortizable) in the hands of the contributor. For assets that were 
section 197(f)(9) intangibles (and thus nonamortizable) in the hands of 
the contributor, however, the partnership may make deductible 
amortization allocations to the noncontributing partners under the 
remedial method only. The final regulations permit remedial allocations 
because, under section 704(c), remedial allocations treat the 
amortizable portion of contributed property like newly purchased 
property, with a new holding period and determinable allocation of tax 
items. This result, which is similar to the result obtained for basis 
increases under section 743, does not follow under the curative method 
because curative allocations are not determined as if the applicable 
property were newly purchased property. The decision to allow 
amortization for remedial allocations in these regulations also is 
consistent with the decisions regarding fungibility of partnership 
interests that are inherent in the recently finalized regulations under 
sections 743 and 755. Finally, the rules governing section 704(c) 
allocations of amortization from section 197 intangibles contributed to 
a partnership in a nonrecognition transaction are still subject to the 
anti-churning provisions. Accordingly, remedial allocations of 
deductible amortization expenses may not be made to a partner who is 
related to a partner that contributes an intangible subject to the 
anti-churning rules. Certain problems may arise in maintaining capital 
accounts where a partnership elects to make remedial allocations, and 
the anti-churning rules apply with respect to one or more partners. 
These problems also arise in the context of section 734(b) adjustments 
and are discussed in the preamble to the proposed regulations relating 
to the application of the anti-churning rules to basis adjustments 
under sections 732(b) and 734(b), which are being issued at the same 
date as these final regulations.
    Commentators requested that the final regulations provide 
additional guidance on how the special anti-churning rule of section 
197(f)(9)(E) applies to increases in the basis of property under 
sections 732, 734, and 743. In accordance with these comments, the 
final regulations provide rules for determining the amount of a basis 
adjustment under sections 732(d) and 743 that will be subject to the 
anti-churning rules. The Treasury Department and the IRS also are 
issuing, at the same time as these final regulations, proposed 
regulations addressing how to determine the amount of a basis 
adjustment under sections 732(b) and 734(b) that will be subject to the 
anti-churning rules.
    Finally, the final regulations provide that where, for purposes of 
the anti-churning rules, a partner is treated as holding its 
proportionate share of partnership property under section 197(f)(9)(E), 
the continued or subsequent use (by license or otherwise) of an 
intangible by a partner could cause the anti-churning rules to apply 
with respect to that partner's share of the intangible in situations 
where a basis step-up under section 732(d) or 743(b) otherwise would be 
amortizable. This rule is necessary in order to prevent the 
circumvention of section 197(f)(9)(A) through the use of a partnership. 
The proposed regulations being issued in conjunction with these final 
regulations expand the application of this rule to basis adjustments 
under sections 732(b) and 734(b).

Contracts for the Use of a Section 197 Intangible

    The proposed regulations provide that a right to use a section 197 
intangible pursuant to a license, contract, or other arrangement is, 
itself, a section 197 intangible. The proposed regulations further 
provide that amounts paid for such a right are chargeable to capital 
account, whether or not the payments would have been deductible (for 
example, as a royalty) if the right were not a section 197 intangible. 
Under the proposed regulations, the amount chargeable to capital 
account is generally determined without regard to sections 483 and 1274 
(that is, no part of the amount paid is recharacterized as unstated 
interest or original issue discount). Finally, the proposed regulations 
treat the acquisition of a franchise, trademark, or trade name as the 
acquisition of a trade or business, thereby preventing other 
intangibles acquired in the same transaction or series of related 
transactions from qualifying for any of the exceptions applicable to 
separately acquired property.
    Commentators suggested that these rules have negative consequences 
for common cross-border and affiliate licenses, which frequently 
include, in addition to rights that would not be subject to section 197 
if not acquired as part of a purchase of a trade or business, rights to 
use a trademark or trade name. Under prior law, amounts paid for these 
licenses were generally currently deductible. The proposed regulations, 
however, require amortization over 15 years. In addition, cost recovery 
over the 15-year period is significantly backloaded because the 
licenses generally involve contingent payments that are not includible 
in basis until the year in which they are paid or incurred and, in 
addition, the proposed regulations provide that sections 483 and 1274 
are generally inapplicable.
    After further consideration of this issue in light of the concerns 
raised by the commentators, the IRS and Treasury Department have 
concluded that, particularly in the case of common licensing 
transactions involving technology and similar intangible property, a 
different approach is appropriate. The clearest indication of 
Congressional intent on this issue is the statement in the legislative 
history to the effect that, with certain exceptions, section 197 
generally does not apply to amounts that were otherwise currently 
deductible before the enactment of section 197. Nevertheless, the IRS 
and Treasury Department are also mindful that Congress directed the 
issuance of such regulations as may be appropriate to prevent avoidance 
of the purposes of section 197.
    The final regulations generally provide that royalty payments under 
a contract for the use of section 197 intangibles unconnected with the 
purchase of a trade or business are not required to be capitalized. 
Licensing transactions will, however, be closely scrutinized under the 
principles of section 1235 for purposes of determining whether the 
payments are, in fact, deductible royalties or, instead, represent 
purchase price that should be charged to capital account.
    The final regulations also modify the rule that treats the 
acquisition of a franchise, trademark, or trade name as the acquisition 
of a trade or business. Under the final regulations, the acquisition of 
an interest in a trademark or trade name is disregarded in determining 
whether acquired property is a trade or business if, under the 
principles of section 1253, the grant of the interest is not a transfer 
of all substantial rights in the trademark or trade name. Thus, the 
acquisition of such an interest in a trademark or trade name will not 
subject other intangibles acquired in the same transaction or series of 
related transactions to the generally less favorable rules applicable 
to intangibles acquired as part of a purchase of a trade or business.
    To prevent abuses, the final regulations provide that if the right 
to use a section 197 intangible is provided under a license entered 
into as part of a purchase of a trade or business, amounts paid for the 
right are, as under the proposed regulations, chargeable to capital 
account. An exception, not contained in the proposed regulations, is 
provided for licenses of technology,

[[Page 3824]]

know-how, and other similar items (including most types of information 
base). Royalties paid under these licenses are not required to be 
capitalized if the taxpayer establishes that the payments are, in fact, 
deductible royalties under general tax principles and represent an 
arm's-length consideration for the transferred rights.
    Finally, any amount otherwise chargeable to capital account with 
respect to a section 197 intangible and payable after the acquisition 
of the intangible to which it relates is treated, in determining the 
tax treatment of the purchaser, as an amount payable under a debt 
instrument. Thus, the extent to which such amounts are treated as 
payments of principal and the time at which the amount treated as 
principal is included in basis is determined under generally applicable 
rules relating to imputed interest and original issue discount. If, 
under these rules, a basis increase occurs after the beginning of the 
15-year amortization period, the increase is amortized over the 
remainder of the 15-year period (or, in the case of an increase 
occurring after the end of the amortization period, is immediately 
deductible).

Anti-churning Rules

    The anti-churning rules of section 197 prevent taxpayers from 
converting goodwill, going concern value, and similar assets held or 
used at any time during the transition period into amortizable section 
197 intangibles through transactions such as transfers to related 
parties. The proposed regulations provide guidance on a number of 
specific issues arising under the anti-churning rules. The final 
regulations retain this guidance with certain modifications and, in 
addition, set forth the purpose of the anti-churning rules (generally, 
to prevent the amortization of certain intangibles that are not 
acquired after the applicable effective date in a transaction giving 
rise to a significant change in ownership or use). The final 
regulations further provide that the anti-churning rules are to be 
applied in a manner that carries out their purpose. The final 
regulations include a rule providing that a transaction will be 
presumed to have a principal purpose of avoiding the anti-churning 
rules if it does not effect a significant change in ownership or use.
    The final regulations also provide additional guidance concerning 
the circumstances in which persons are treated as related for purposes 
of the anti-churning rules. Section 197 provides that a relationship is 
tested for purposes of the anti-churning rules both immediately before 
and immediately after the acquisition. The proposed regulations further 
provide that, in the case of intangibles acquired in a series of 
related transactions, testing begins immediately before the first 
acquisition and continues until immediately after the last acquisition. 
Comments suggested that momentary relationships created in the course 
of the acquisition should be disregarded for purposes of the anti-
churning rules. Such relationships can arise, for example, in the 
course of a stock acquisition followed by a liquidation or when assets 
are contributed to a newly created subsidiary and, pursuant to a 
binding commitment, all stock of the subsidiary is sold to an unrelated 
person or persons immediately after the contribution.
    To address these and similar situations, the final regulations 
provide that in the case of a series of related transactions (or a 
series of transactions that together comprise a qualified stock 
purchase within the meaning of section 338(d)(3)) a person is treated 
as related to another person if the relationship exists immediately 
before the earliest such transaction or immediately after the last such 
transaction. In addition, any relationship created as part of a series 
of related transactions in which a person acquires stock of a 
corporation followed by a liquidation of the acquired corporation under 
section 331 generally is disregarded. Further, as with all other 
provisions of the regulations relating to the anti-churning rules, 
these provisions are to be applied in a manner that carries out the 
purpose of the anti-churning rules.
    The final regulations also provide guidance on the exemption from 
the anti-churning rules if the person from whom the taxpayer acquires 
an intangible elects to recognize gain and agrees to pay a specified 
amount of tax. In general, these rules are the same as those contained 
in the proposed regulations, except that the proposed regulations do 
not prescribe procedures for making the election. The final regulations 
provide guidance on the manner of making the election, including 
procedures that apply to persons not otherwise subject to Federal 
income tax.

Effective Dates

    The regulations under sections 167(f) and 197 were proposed to 
apply on the date on which the final regulations are published in the 
Federal Register. Regulations to implement section 197(e)(4)(D) 
(separately acquired contracts of fixed duration or amount) were 
proposed to apply August 11, 1993, for property acquired after August 
10, 1993 (or July 26, 1991, if a valid retroactive election has been 
made under Sec. 1.197-1T). Comments suggested that the applicability 
date should be modified to clarify that the regulations (other than the 
implementation of section 197(e)(4)(D)) apply only to property acquired 
on or after the date final regulations are published. This suggestion 
has been adopted. Accordingly, the final regulations generally apply 
only to intangible property acquired after the date they are published 
in the Federal Register.
    The applicability date of the rules implementing section 
197(e)(4)(D) is similarly clarified. Thus, the final regulations 
provide that these rules apply to property acquired after August 10, 
1993 (or July 25, 1991, if a valid retroactive election has been made 
under Sec. 1.197-1T). The regulations also provide consent for changes 
in method of accounting to comply with the rules and automatic 
procedures for making the change.
    In addition, the final regulations permit taxpayers to apply the 
rules in the final regulations to property acquired before the 
applicability date of the final regulations (or to rely on the proposed 
regulations for such property) and provide similar consent and 
automatic change procedures for taxpayers that choose to apply the 
final regulations to pre-effective date acquisitions.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations do not have a significant impact on a 
substantial number of small entities. This certification is based on 
the fact that the time required to prepare and file the election 
statement and notify acquirers is minimal and will not have a 
significant impact on those few small entities that choose to make the 
election. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. It 
also has been determined that section 553(b) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking was submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

[[Page 3825]]

Drafting Information

    The principal author of these regulations is John Huffman, Office 
of Assistant Chief Counsel (Passthroughs and Special Industries), IRS. 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.197-2 also issued under 26 U.S.C. 197(g). * * *

    Par. 2. Section 1.162-11 is amended by adding a sentence at the end 
of paragraph (a) to read as follows:


Sec. 1.162-11  Rentals.

    (a) * * * See Sec. 1.197-2 for rules governing the amortization of 
costs to acquire limited interests in section 197 intangibles.
* * * * *

    Par. 3. Section 1.167(a)-3 is amended by adding a sentence at the 
end to read as follows:


Sec. 1.167(a)-3  Intangibles.

    * * * See sections 197 and 167(f) and, to the extent applicable, 
Secs. 1.197-2 and 1.167(a)-14 for amortization of goodwill and certain 
other intangibles acquired after August 10, 1993, or after July 25, 
1991, if a valid retroactive election under Sec. 1.197-1T has been 
made.

    Par. 4. Section 1.167(a)-6 is amended by adding two sentences at 
the end of paragraph (a) to read as follows:


Sec. 1.167(a)-6  Depreciation in special cases.

    (a) * * * See Sec. 1.167(a)-14(c)(4) for depreciation of a 
separately acquired interest in a patent or copyright described in 
section 167(f)(2) acquired after January 25, 2000. See Sec. 1.197-2 for 
amortization of interests in patents and copyrights that constitute 
amortizable section 197 intangibles.
* * * * *

    Par. 5. Section 1.167(a)-14 is added to read as follows:


Sec. 1.167(a)-14  Treatment of certain intangible property excluded 
from section 197.

    (a) Overview. This section provides rules for the amortization of 
certain intangibles that are excluded from section 197 (relating to the 
amortization of goodwill and certain other intangibles). These excluded 
intangibles are specifically described in Sec. 1.197-2(c) (4), (6), 
(7), (11), and (13) and include certain computer software and certain 
other separately acquired rights, such as rights to receive tangible 
property or services, patents and copyrights, certain mortgage 
servicing rights, and rights of fixed duration or amount. Intangibles 
for which an amortization amount is determined under section 167(f) and 
intangibles otherwise excluded from section 197 are amortizable only if 
they qualify as property subject to the allowance for depreciation 
under section 167(a).
    (b) Computer software--(1) In general. The amount of the deduction 
for computer software described in section 167(f)(1) and Sec. 1.197-
2(c)(4) is determined by amortizing the cost or other basis of the 
computer software using the straight line method described in 
Sec. 1.167(b)-1 (except that its salvage value is treated as zero) and 
an amortization period of 36 months beginning on the first day of the 
month that the computer software is placed in service. If costs for 
developing computer software that the taxpayer properly elects to defer 
under section 174(b) result in the development of property subject to 
the allowance for depreciation under section 167, the rules of this 
paragraph (b) will apply to the unrecovered costs. In addition, this 
paragraph (b) applies to the cost of separately acquired computer 
software where these costs are separately stated and the costs are 
required to be capitalized under section 263(a).
    (2) Exceptions. Paragraph (b)(1) of this section does not apply to 
the cost of computer software properly and consistently taken into 
account under Sec. 1.162-11. The cost of acquiring an interest in 
computer software that is included, without being separately stated, in 
the cost of the hardware or other tangible property is treated as part 
of the cost of the hardware or other tangible property that is 
capitalized and depreciated under other applicable sections of the 
Internal Revenue Code.
    (3) Additional rules. Rules similar to those in Sec. 1.197-2 
(f)(1)(iii), (f)(1)(iv), and (f)(2) (relating to the computation of 
amortization deductions and the treatment of contingent amounts) apply 
for purposes of this paragraph (b).
    (c) Certain interests or rights not acquired as part of a purchase 
of a trade or business--(1) Certain rights to receive tangible property 
or services. The amount of the deduction for a right (other than a 
right acquired as part of a purchase of a trade or business) to receive 
tangible property or services under a contract or from a governmental 
unit (as specified in section 167(f)(2) and Sec. 1.197-2(c)(6)) is 
determined as follows:
    (i) Amortization of fixed amounts. The basis of a right to receive 
a fixed amount of tangible property or services is amortized for each 
taxable year by multiplying the basis of the right by a fraction, the 
numerator of which is the amount of tangible property or services 
received during the taxable year and the denominator of which is the 
total amount of tangible property or services received or to be 
received under the terms of the contract or governmental grant. For 
example, if a taxpayer acquires a favorable contract right to receive a 
fixed amount of raw materials during an unspecified period, the 
taxpayer must amortize the cost of acquiring the contract right by 
multiplying the total cost by a fraction, the numerator of which is the 
amount of raw materials received under the contract during the taxable 
year and the denominator of which is the total amount of raw materials 
received or to be received under the contract.
    (ii) Amortization of unspecified amount over fixed period. The cost 
or other basis of a right to receive an unspecified amount of tangible 
property or services over a fixed period is amortized ratably over the 
period of the right. (See paragraph (c)(3) of this section regarding 
renewals).
    (iii) Amortization in other cases. [Reserved]
    (2) Rights of fixed duration or amount. The amount of the deduction 
for a right (other than a right acquired as part of a purchase of a 
trade or business) of fixed duration or amount received under a 
contract or granted by a governmental unit (specified in section 
167(f)(2) and Sec. 1.197-2(c)(13)) and not covered by paragraph (c)(1) 
of this section is determined as follows:
    (i) Rights to a fixed amount. The basis of a right to a fixed 
amount is amortized for each taxable year by multiplying the basis by a 
fraction, the numerator of which is the amount received during the 
taxable year and the denominator of which is the total amount received 
or to be received under the terms of the contract or governmental 
grant.

[[Page 3826]]

    (ii) Rights to an unspecified amount over fixed duration of less 
than 15 years. The basis of a right to an unspecified amount over a 
fixed duration of less than 15 years is amortized ratably over the 
period of the right.
    (3) Application of renewals. (i) For purposes of paragraphs (c) (1) 
and (2) of this section, the duration of a right under a contract (or 
granted by a governmental unit) includes any renewal period if, based 
on all of the facts and circumstances in existence at any time during 
the taxable year in which the right is acquired, the facts clearly 
indicate a reasonable expectancy of renewal.
    (ii) The mere fact that a taxpayer will have the opportunity to 
renew a contract right or other right on the same terms as are 
available to others, in a competitive auction or similar process that 
is designed to reflect fair market value and in which the taxpayer is 
not contractually advantaged, will generally not be taken into account 
in determining the duration of such right provided that the bidding 
produces a fair market value price comparable to the price that would 
be obtained if the rights were purchased immediately after renewal from 
a person (other than the person granting the renewal) in an arm's-
length transaction.
    (iii) The cost of a renewal not included in the terms of the 
contract or governmental grant is treated as the acquisition of a 
separate intangible asset.
    (4) Patents and copyrights. If the purchase price of a interest 
(other than an interest acquired as part of a purchase of a trade or 
business) in a patent or copyright described in section 167(f)(2) and 
Sec. 1.197-2(c)(7) is payable on at least an annual basis as either a 
fixed amount per use or a fixed percentage of the revenue derived from 
the use of the patent or copyright, the depreciation deduction for a 
taxable year is equal to the amount of the purchase price paid or 
incurred during the year. Otherwise, the basis of such patent or 
copyright (or an interest therein) is depreciated either ratably over 
its remaining useful life or under section 167(g) (income forecast 
method). If a patent or copyright becomes valueless in any year before 
its legal expiration, the adjusted basis may be deducted in that year.
    (5) Additional rules. The period of amortization under paragraphs 
(c) (1) through (4) of this section begins when the intangible is 
placed in service, and rules similar to those in Sec. 1.197-2(f)(2) 
apply for purposes of this paragraph (c).
    (d) Mortgage servicing rights--(1) In general. The amount of the 
deduction for mortgage servicing rights described in section 167(f)(3) 
and Sec. 1.197-2(c)(11) is determined by using the straight line method 
described in Sec. 1.167(b)-1 (except that the salvage value is treated 
as zero) and an amortization period of 108 months beginning on the 
first day of the month that the rights are placed in service. Mortgage 
servicing rights are not depreciable to the extent the rights are 
stripped coupons under section 1286.
    (2) Treatment of rights acquired as a pool--(i) In general. Except 
as provided in paragraph (d)(2)(ii) of this section, all mortgage 
servicing rights acquired in the same transaction or in a series of 
related transactions are treated as a single asset (the pool) for 
purposes of determining the depreciation deduction under this paragraph 
(d) and any gain or loss from the sale, exchange, or other disposition 
of the rights. Thus, if some (but not all) of the rights in a pool 
become worthless as a result of prepayments, no loss is recognized by 
reason of the prepayment and the adjusted basis of the pool is not 
affected by the unrecognized loss. Similarly, any amount realized from 
the sale or exchange of some (but not all) of the mortgage servicing 
rights is included in income and the adjusted basis of the pool is not 
affected by the realization.
    (ii) Multiple accounts. If the taxpayer establishes multiple 
accounts within a pool at the time of its acquisition, gain or loss is 
recognized on the sale or exchange of all mortgage servicing rights 
within any such account.
    (3) Additional rules. Rules similar to those in Sec. 1.197-
2(f)(1)(iii), (f)(1)(iv), and (f)(2) (relating to the computation of 
amortization deductions and the treatment of contingent amounts) apply 
for purposes of this paragraph (d).
    (e) Effective date--(1) In general. This section applies to 
property acquired after January 25, 2000, except that Sec. 1.167(a)-
14(c)(2) (depreciation of the cost of certain separately acquired 
rights) and so much of Sec. 1.167(a)-14(c)(3) as relates to 
Sec. 1.167(a)-14(c)(2) apply to property acquired after August 10, 1993 
(or July 25, 1991, if a valid retroactive election has been made under 
Sec. 1.197-1T).
    (2) Change in method of accounting. See Sec. 1.197-2(l)(4) for 
rules relating to changes in method of accounting for property to which 
Sec. 1.167(a)-14 applies.

    Par. 6. Section 1.197-0 is added to read as follows:


Sec. 1.197-0  Table of contents.

    This section lists the headings that appear in Sec. 1.197-2.


Sec. 1.197-2  Amortization of goodwill and certain other intangibles.

(a) Overview.
(1) In general.
(2) Section 167(f) property.
(3) Amounts otherwise deductible.
(b) Section 197 intangibles; in general.
(1) Goodwill.
(2) Going concern value.
(3) Workforce in place.
(4) Information base.
(5) Know-how, etc.
(6) Customer-based intangibles.
(7) Supplier-based intangibles.
(8) Licenses, permits, and other rights granted by governmental 
units.
(9) Covenants not to compete and other similar arrangements.
(10) Franchises, trademarks, and trade names.
(11) Contracts for the use of, and term interests in, other section 
197 intangibles.
(12) Other similar items.
(c) Section 197 intangibles; exceptions.
(1) Interests in a corporation, partnership, trust, or estate.
(2) Interests under certain financial contracts.
(3) Interests in land.
(4) Certain computer software.
(i) Publicly available.
(ii) Not acquired as part of trade or business.
(iii) Other exceptions.
(iv) Computer software defined.
(5) Certain interests in films, sound recordings, video tapes, 
books, or other similar property.
(6) Certain rights to receive tangible property or services.
(7) Certain interests in patents or copyrights.
(8) Interests under leases of tangible property.
(i) Interest as a lessor.
(ii) Interest as a lessee.
(9) Interests under indebtedness.
(i) In general.
(ii) Exceptions.
(10) Professional sports franchises.
(11) Mortgage servicing rights.
(12) Certain transaction costs.
(13) Rights of fixed duration or amount.
(d) Amortizable section 197 intangibles.
(1) Definition.
(2) Exception for self-created intangibles.
(i) In general.
(ii) Created by the taxpayer.
(A) Defined.
(B) Contracts for the use of intangibles.
(C) Improvements and modifications.
(iii) Exceptions.
(3) Exception for property subject to anti-churning rules.
(e) Purchase of a trade or business.
(1) Goodwill or going concern value.
(2) Franchise, trademark, or trade name.
(i) In general.
(ii) Exceptions.
(3) Acquisitions to be included.
(4) Substantial portion.
(5) Deemed asset purchases under section 338.
(6) Mortgage servicing rights.
(7) Computer software acquired for internal use.
(f) Computation of amortization deduction.
(1) In general.
(2) Treatment of contingent amounts.
(i) Amounts added to basis during 15-year period.

[[Page 3827]]

(ii) Amounts becoming fixed after expiration of 15-year period.
(iii) Rules for including amounts in basis.
(3) Basis determinations for certain assets.
(i) Covenants not to compete.
(ii) Contracts for the use of section 197 intangibles; acquired as 
part of a trade or business.
(A) In general.
(B) Know-how and certain information base.
(iii) Contracts for the use of section 197 intangibles; not acquired 
as part of a trade or business.
(iv) Applicable rules.
(A) Franchises, trademarks, and trade names.
(B) Certain amounts treated as payable under a debt instrument.
(1) In general.
(2) Rights granted by governmental units.
(3) Treatment of other parties to transaction.
(4) Basis determinations in certain transactions.
(i) Certain renewal transactions.
(ii) Transactions subject to section 338 or 1060.
(iii) Certain reinsurance transactions.
(g) Special rules.
(1) Treatment of certain dispositions.
(i) Loss disallowance rules.
(A) In general.
(B) Abandonment or worthlessness.
(C) Certain nonrecognition transfers.
(ii) Separately acquired property.
(iii) Disposition of a covenant not to compete.
(iv) Taxpayers under common control.
(A) In general.
(B) Treatment of disallowed loss.
(2) Treatment of certain nonrecognition and exchange transactions.
(i) Relationship to anti-churning rules.
(ii) Treatment of nonrecognition and exchange transactions 
generally.
(A) Transfer disregarded.
(B) Application of general rule.
(C) Transactions covered.
(iii) Certain exchanged-basis property.
(iv) Transfers under section 708(b)(1).
(A) In general.
(B) Termination by sale or exchange of interest.
(C) Other terminations.
(3) Increase in the basis of partnership property under section 
732(b), 734(b), 743(b), or 732(d).
(4) Section 704(c) allocations.
(i) Allocations where the intangible is amortizable by the 
contributor.
(ii) Allocations where the intangible is not amortizable by the 
contributor.
(5) Treatment of certain reinsurance transactions.
(i) In general.
(ii) Determination of adjusted basis.
(A) Acquisitions (other than under section 338) of specified 
insurance contracts.
(B) Insolvent ceding company
(C) Other acquisitions. [Reserved]
(6) Amounts paid or incurred for a franchise, trademark, or trade 
name.
(7) Amounts properly taken into account in determining the cost of 
property that is not a section 197 intangible.
(8) Treatment of amortizable section 197 intangibles as depreciable 
property.
(h) Anti-churning rules.
(1) Scope and purpose.
(i) Scope.
(ii) Purpose.
(2) Treatment of section 197(f)(9) intangibles.
(3) Amounts deductible under section 1253(d) or Sec. 1.162-11.
(4) Transition period.
(5) Exceptions.
(6) Related person.
(i) In general.
(ii) Time for testing relationships.
(iii) Certain relationships disregarded.
(iv) De minimis rule.
(A) In general.
(B) Determination of beneficial ownership interest.
(7) Special rules for entities that owned or used property at any 
time during the transition period and that are no longer in 
existence.
(8) Special rules for section 338 deemed acquisitions.
(9) Gain-recognition exception.
(i) Applicability.
(ii) Effect of exception.
(iii) Time and manner of election.
(iv) Special rules for certain entities.
(v) Effect of nonconforming elections.
(vi) Notification requirements.
(vii) Revocation.
(viii) Election Statement.
(ix) Determination of highest marginal rate of tax and amount of 
other Federal income tax on gain.
(A) Marginal rate.
(1) Noncorporate taxpayers.
(2) Corporations and tax-exempt entities.
(B) Other Federal income tax on gain.
(x) Coordination with other provisions.
(A) In general.
(B) Section 1374.
(C) Procedural and administrative provisions.
(D) Installment method.
(xi) Special rules for persons not otherwise subject to Federal 
income tax.
(10) Transactions subject to both anti-churning and nonrecognition 
rules.
(11) Avoidance purpose.
(12) Additional partnership anti-churning rules
(i) In general.
(ii) Section 732(b) adjustments. [Reserved]
(iii) Section 732(d) adjustments.
(iv) Section 734(b) adjustments. [Reserved]
(v) Section 743(b) adjustments.
(vi) Partner is or becomes a user of partnership intangible.
(A) General rule.
(B) Anti-churning partner.
(C) Effect of retroactive elections.
(vii) Section 704(c) elections.
(A) Allocations where the intangible is amortizable by the 
contributor.
(B) Allocations where the intangible is not amortizable by the 
contributor.
(viii) Operating rule for transfers upon death.
(i) Reserved
(j) General anti-abuse rule.
(k) Examples.
(l) Effective dates.
(1) In general.
(2) Application to pre-effective date acquisitions.
(3) Application of regulation project REG-209709-94 to pre-effective 
date acquisitions.
(4) Change in method of accounting.
(i) In general.
(ii) Application to pre-effective date transactions.
(iii) Automatic change procedures.

    Par. 7. Section 1.197-2 is added to read as follows:


Sec. 1.197-2  Amortization of goodwill and certain other intangibles.

    (a) Overview--(1) In general. Section 197 allows an amortization 
deduction for the capitalized costs of an amortizable section 197 
intangible and prohibits any other depreciation or amortization with 
respect to that property. Paragraphs (b), (c), and (e) of this section 
provide rules and definitions for determining whether property is a 
section 197 intangible, and paragraphs (d) and (e) of this section 
provide rules and definitions for determining whether a section 197 
intangible is an amortizable section 197 intangible. The amortization 
deduction under section 197 is determined by amortizing basis ratably 
over a 15-year period under the rules of paragraph (f) of this section. 
Section 197 also includes various special rules pertaining to the 
disposition of amortizable section 197 intangibles, nonrecognition 
transactions, anti-churning rules, and anti-abuse rules. Rules relating 
to these provisions are contained in paragraphs (g), (h), and (j) of 
this section. Examples demonstrating the application of these 
provisions are contained in paragraph (k) of this section. The 
effective date of the rules in this section is contained in paragraph 
(l) of this section.
    (2) Section 167(f) property. Section 167(f) prescribes rules for 
computing the depreciation deduction for certain property to which 
section 197 does not apply. See Sec. 1.167(a)-14 for rules under 
section 167(f) and paragraphs (c)(4), (6), (7), (11), and (13) of this 
section for a description of the property subject to section 167(f).
    (3) Amounts otherwise deductible. Section 197 does not apply to 
amounts that are not chargeable to capital account under paragraph 
(f)(3) (relating to basis determinations for covenants not to compete 
and certain contracts for the use of section 197 intangibles) of this 
section and are otherwise currently deductible. For this purpose, an 
amount described in Sec. 1.162-11 is not currently deductible if, 
without regard to Sec. 1.162-11, such amount is properly chargeable to 
capital account.
    (b) Section 197 intangibles; in general. Except as otherwise 
provided in paragraph (c) of this section, the term section 197 
intangible means any property described in section 197(d)(1). The 
following rules and definitions provide guidance concerning property

[[Page 3828]]

that is a section 197 intangible unless an exception applies:
    (1) Goodwill. Section 197 intangibles include goodwill. Goodwill is 
the value of a trade or business attributable to the expectancy of 
continued customer patronage. This expectancy may be due to the name or 
reputation of a trade or business or any other factor.
    (2) Going concern value. Section 197 intangibles include going 
concern value. Going concern value is the additional value that 
attaches to property by reason of its existence as an integral part of 
an ongoing business activity. Going concern value includes the value 
attributable to the ability of a trade or business (or a part of a 
trade or business) to continue functioning or generating income without 
interruption notwithstanding a change in ownership, but does not 
include any of the intangibles described in any other provision of this 
paragraph (b). It also includes the value that is attributable to the 
immediate use or availability of an acquired trade or business, such 
as, for example, the use of the revenues or net earnings that otherwise 
would not be received during any period if the acquired trade or 
business were not available or operational.
    (3) Workforce in place. Section 197 intangibles include workforce 
in place. Workforce in place (sometimes referred to as agency force or 
assembled workforce) includes the composition of a workforce (for 
example, the experience, education, or training of a workforce), the 
terms and conditions of employment whether contractual or otherwise, 
and any other value placed on employees or any of their attributes. 
Thus, the amount paid or incurred for workforce in place includes, for 
example, any portion of the purchase price of an acquired trade or 
business attributable to the existence of a highly-skilled workforce, 
an existing employment contract (or contracts), or a relationship with 
employees or consultants (including, but not limited to, any key 
employee contract or relationship). Workforce in place does not include 
any covenant not to compete or other similar arrangement described in 
paragraph (b)(9) of this section.
    (4) Information base. Section 197 intangibles include any 
information base, including a customer-related information base. For 
this purpose, an information base includes business books and records, 
operating systems, and any other information base (regardless of the 
method of recording the information) and a customer-related information 
base is any information base that includes lists or other information 
with respect to current or prospective customers. Thus, the amount paid 
or incurred for information base includes, for example, any portion of 
the purchase price of an acquired trade or business attributable to the 
intangible value of technical manuals, training manuals or programs, 
data files, and accounting or inventory control systems. Other examples 
include the cost of acquiring customer lists, subscription lists, 
insurance expirations, patient or client files, or lists of newspaper, 
magazine, radio, or television advertisers.
    (5) Know-how, etc. Section 197 intangibles include any patent, 
copyright, formula, process, design, pattern, know-how, format, package 
design, computer software (as defined in paragraph (c)(4)(iv) of this 
section), or interest in a film, sound recording, video tape, book, or 
other similar property. (See, however, the exceptions in paragraph (c) 
of this section.)
    (6) Customer-based intangibles. Section 197 intangibles include any 
customer-based intangible. A customer-based intangible is any 
composition of market, market share, or other value resulting from the 
future provision of goods or services pursuant to contractual or other 
relationships in the ordinary course of business with customers. Thus, 
the amount paid or incurred for customer-based intangibles includes, 
for example, any portion of the purchase price of an acquired trade or 
business attributable to the existence of a customer base, a 
circulation base, an undeveloped market or market growth, insurance in 
force, the existence of a qualification to supply goods or services to 
a particular customer, a mortgage servicing contract (as defined in 
paragraph (c)(11) of this section), an investment management contract, 
or other relationship with customers involving the future provision of 
goods or services. (See, however, the exceptions in paragraph (c) of 
this section.) In addition, customer-based intangibles include the 
deposit base and any similar asset of a financial institution. Thus, 
the amount paid or incurred for customer-based intangibles also 
includes any portion of the purchase price of an acquired financial 
institution attributable to the value represented by existing checking 
accounts, savings accounts, escrow accounts, and other similar items of 
the financial institution. However, any portion of the purchase price 
of an acquired trade or business attributable to accounts receivable or 
other similar rights to income for goods or services provided to 
customers prior to the acquisition of a trade or business is not an 
amount paid or incurred for a customer-based intangible.
    (7) Supplier-based intangibles. Section 197 intangibles include any 
supplier-based intangible. A supplier-based intangible is the value 
resulting from the future acquisition, pursuant to contractual or other 
relationships with suppliers in the ordinary course of business, of 
goods or services that will be sold or used by the taxpayer. Thus, the 
amount paid or incurred for supplier-based intangibles includes, for 
example, any portion of the purchase price of an acquired trade or 
business attributable to the existence of a favorable relationship with 
persons providing distribution services (such as favorable shelf or 
display space at a retail outlet), the existence of a favorable credit 
rating, or the existence of favorable supply contracts. The amount paid 
or incurred for supplier-based intangibles does not include any amount 
required to be paid for the goods or services themselves pursuant to 
the terms of the agreement or other relationship. In addition, see the 
exceptions in paragraph (c) of this section, including the exception in 
paragraph (c)(6) of this section for certain rights to receive tangible 
property or services from another person.
    (8) Licenses, permits, and other rights granted by governmental 
units. Section 197 intangibles include any license, permit, or other 
right granted by a governmental unit (including, for purposes of 
section 197, an agency or instrumentality thereof) even if the right is 
granted for an indefinite period or is reasonably expected to be 
renewed for an indefinite period. These rights include, for example, a 
liquor license, a taxi-cab medallion (or license), an airport landing 
or takeoff right (sometimes referred to as a slot), a regulated airline 
route, or a television or radio broadcasting license. The issuance or 
renewal of a license, permit, or other right granted by a governmental 
unit is considered an acquisition of the license, permit, or other 
right. (See, however, the exceptions in paragraph (c) of this section, 
including the exceptions in paragraph (c)(3) of this section for an 
interest in land, paragraph (c)(6) of this section for certain rights 
to receive tangible property or services, paragraph (c)(8) of this 
section for an interest under a lease of tangible property, and 
paragraph (c)(13) of this section for certain rights granted by a 
governmental unit. See paragraph (b)(10) of this section for the 
treatment of franchises.)
    (9) Covenants not to compete and other similar arrangements. 
Section 197 intangibles include any covenant not to

[[Page 3829]]

compete, or agreement having substantially the same effect, entered 
into in connection with the direct or indirect acquisition of an 
interest in a trade or business or a substantial portion thereof. For 
purposes of this paragraph (b)(9), an acquisition may be made in the 
form of an asset acquisition (including a qualified stock purchase that 
is treated as a purchase of assets under section 338), a stock 
acquisition or redemption, and the acquisition or redemption of a 
partnership interest. An agreement requiring the performance of 
services for the acquiring taxpayer or the provision of property or its 
use to the acquiring taxpayer does not have substantially the same 
effect as a covenant not to compete to the extent that the amount paid 
under the agreement represents reasonable compensation for the services 
actually rendered or for the property or use of the property actually 
provided.
    (10) Franchises, trademarks, and trade names. (i) Section 197 
intangibles include any franchise, trademark, or trade name. The term 
franchise has the meaning given in section 1253(b)(1) and includes any 
agreement that provides one of the parties to the agreement with the 
right to distribute, sell, or provide goods, services, or facilities, 
within a specified area. The term trademark includes any word, name, 
symbol, or device, or any combination thereof, adopted and used to 
identify goods or services and distinguish them from those provided by 
others. The term trade name includes any name used to identify or 
designate a particular trade or business or the name or title used by a 
person or organization engaged in a trade or business. A license, 
permit, or other right granted by a governmental unit is a franchise if 
it otherwise meets the definition of a franchise. A trademark or trade 
name includes any trademark or trade name arising under statute or 
applicable common law, and any similar right granted by contract. The 
renewal of a franchise, trademark, or trade name is treated as an 
acquisition of the franchise, trademark, or trade name.
    (ii) Notwithstanding the definitions provided in paragraph 
(b)(10)(i) of this section, any amount that is paid or incurred on 
account of a transfer, sale, or other disposition of a franchise, 
trademark, or trade name and that is subject to section 1253(d)(1) is 
not included in the basis of a section 197 intangible. (See paragraph 
(g)(6) of this section.)
    (11) Contracts for the use of, and term interests in, section 197 
intangibles. Section 197 intangibles include any right under a license, 
contract, or other arrangement providing for the use of property that 
would be a section 197 intangible under any provision of this paragraph 
(b) (including this paragraph (b)(11)) after giving effect to all of 
the exceptions provided in paragraph (c) of this section. Section 197 
intangibles also include any term interest (whether outright or in 
trust) in such property.
    (12) Other similar items. Section 197 intangibles include any other 
intangible property that is similar in all material respects to the 
property specifically described in section 197(d)(1)(C)(i) through (v) 
and paragraphs (b)(3) through (7) of this section. (See paragraph 
(g)(5) of this section for special rules regarding certain reinsurance 
transactions.)
    (c) Section 197 intangibles; exceptions. The term section 197 
intangible does not include property described in section 197(e). The 
following rules and definitions provide guidance concerning property to 
which the exceptions apply:
    (1)Interests in a corporation, partnership, trust, or estate. 
Section 197 intangibles do not include an interest in a corporation, 
partnership, trust, or estate. Thus, for example, amortization under 
section 197 is not available for the cost of acquiring stock, 
partnership interests, or interests in a trust or estate, whether or 
not the interests are regularly traded on an established market. (See 
paragraph (g)(3) of this section for special rules applicable to 
property of a partnership when a section 754 election is in effect for 
the partnership.)
    (2) Interests under certain financial contracts. Section 197 
intangibles do not include an interest under an existing futures 
contract, foreign currency contract, notional principal contract, 
interest rate swap, or other similar financial contract, whether or not 
the interest is regularly traded on an established market. However, 
this exception does not apply to an interest under a mortgage servicing 
contract, credit card servicing contract, or other contract to service 
another person's indebtedness, or an interest under an assumption 
reinsurance contract. (See paragraph (g)(5) of this section for the 
treatment of assumption reinsurance contracts. See paragraph (c)(11) of 
this section and Sec. 1.167(a)-14(d) for the treatment of mortgage 
servicing rights.)
    (3) Interests in land. Section 197 intangibles do not include any 
interest in land. For this purpose, an interest in land includes a fee 
interest, life estate, remainder, easement, mineral right, timber 
right, grazing right, riparian right, air right, zoning variance, and 
any other similar right, such as a farm allotment, quota for farm 
commodities, or crop acreage base. An interest in land does not include 
an airport landing or takeoff right, a regulated airline route, or a 
franchise to provide cable television service. The cost of acquiring a 
license, permit, or other land improvement right, such as a building 
construction or use permit, is taken into account in the same manner as 
the underlying improvement.
    (4) Certain computer software--(i) Publicly available. Section 197 
intangibles do not include any interest in computer software that is 
(or has been) readily available to the general public on similar terms, 
is subject to a nonexclusive license, and has not been substantially 
modified. Computer software will be treated as readily available to the 
general public if the software may be obtained on substantially the 
same terms by a significant number of persons that would reasonably be 
expected to use the software. This requirement can be met even though 
the software is not available through a system of retail distribution. 
Computer software will not be considered to have been substantially 
modified if the cost of all modifications to the version of the 
software that is readily available to the general public does not 
exceed the greater of 25 percent of the price at which the unmodified 
version of the software is readily available to the general public or 
$2,000. For the purpose of determining whether computer software has 
been substantially modified--
    (A) Integrated programs acquired in a package from a single source 
are treated as a single computer program; and
    (B) Any cost incurred to install the computer software on a system 
is not treated as a cost of the software. However, the costs for 
customization, such as tailoring to a user's specifications (other than 
embedded programming options) are costs of modifying the software.
    (ii) Not acquired as part of trade or business. Section 197 
intangibles do not include an interest in computer software that is not 
acquired as part of a purchase of a trade or business.
    (iii) Other exceptions. For other exceptions applicable to computer 
software, see paragraph (a)(3) of this section (relating to otherwise 
deductible amounts) and paragraph (g)(7) of this section (relating to 
amounts properly taken into account in determining the cost of property 
that is not a section 197 intangible).
    (iv) Computer software defined. For purposes of this section, 
computer software is any program or routine (that is, any sequence of 
machine-readable

[[Page 3830]]

code) that is designed to cause a computer to perform a desired 
function or set of functions, and the documentation required to 
describe and maintain that program or routine. It includes all forms 
and media in which the software is contained, whether written, 
magnetic, or otherwise. Computer programs of all classes, for example, 
operating systems, executive systems, monitors, compilers and 
translators, assembly routines, and utility programs as well as 
application programs, are included. Computer software also includes any 
incidental and ancillary rights that are necessary to effect the 
acquisition of the title to, the ownership of, or the right to use the 
computer software, and that are used only in connection with that 
specific computer software. Such incidental and ancillary rights are 
not included in the definition of trademark or trade name under 
paragraph (b)(10)(i) of this section. For example, a trademark or trade 
name that is ancillary to the ownership or use of a specific computer 
software program in the taxpayer's trade or business and is not 
acquired for the purpose of marketing the computer software is included 
in the definition of computer software and is not included in the 
definition of trademark or trade name. Computer software does not 
include any data or information base described in paragraph (b)(4) of 
this section unless the data base or item is in the public domain and 
is incidental to a computer program. For this purpose, a copyrighted or 
proprietary data or information base is treated as in the public domain 
if its availability through the computer program does not contribute 
significantly to the cost of the program. For example, if a word-
processing program includes a dictionary feature used to spell-check a 
document or any portion thereof, the entire program (including the 
dictionary feature) is computer software regardless of the form in 
which the feature is maintained or stored.
    (5) Certain interests in films, sound recordings, video tapes, 
books, or other similar property. Section 197 intangibles do not 
include any interest (including an interest as a licensee) in a film, 
sound recording, video tape, book, or other similar property (such as 
the right to broadcast or transmit a live event) if the interest is not 
acquired as part of a purchase of a trade or business. A film, sound 
recording, video tape, book, or other similar property includes any 
incidental and ancillary rights (such as a trademark or trade name) 
that are necessary to effect the acquisition of title to, the ownership 
of, or the right to use the property and are used only in connection 
with that property. Such incidental and ancillary rights are not 
included in the definition of trademark or trade name under paragraph 
(b)(10)(i) of this section. For purposes of this paragraph (c)(5), 
computer software (as defined in paragraph (c)(4)(iv) of this section) 
is not treated as other property similar to a film, sound recording, 
video tape, or book. (See section 167 for amortization of excluded 
intangible property or interests.)
    (6) Certain rights to receive tangible property or services. 
Section 197 intangibles do not include any right to receive tangible 
property or services under a contract or from a governmental unit if 
the right is not acquired as part of a purchase of a trade or business. 
Any right that is described in the preceding sentence is not treated as 
a section 197 intangible even though the right is also described in 
section 197(d)(1)(D) and paragraph (b)(8) of this section (relating to 
certain governmental licenses, permits, and other rights) and even 
though the right fails to meet one or more of the requirements of 
paragraph (c)(13) of this section (relating to certain rights of fixed 
duration or amount). (See Sec. 1.167(a)-14(c) (1) and (3) for 
applicable rules.)
    (7) Certain interests in patents or copyrights. Section 197 
intangibles do not include any interest (including an interest as a 
licensee) in a patent, patent application, or copyright that is not 
acquired as part of a purchase of a trade or business. A patent or 
copyright includes any incidental and ancillary rights (such as a 
trademark or trade name) that are necessary to effect the acquisition 
of title to, the ownership of, or the right to use the property and are 
used only in connection with that property. Such incidental and 
ancillary rights are not included in the definition of trademark or 
trade name under paragraph (b)(10)(i) of this section. (See 
Sec. 1.167(a)-14(c)(4) for applicable rules.)
    (8) Interests under leases of tangible property--(i) Interest as a 
lessor. Section 197 intangibles do not include any interest as a lessor 
under an existing lease or sublease of tangible real or personal 
property. In addition, the cost of acquiring an interest as a lessor in 
connection with the acquisition of tangible property is taken into 
account as part of the cost of the tangible property. For example, if a 
taxpayer acquires a shopping center that is leased to tenants operating 
retail stores, any portion of the purchase price attributable to 
favorable lease terms is taken into account as part of the basis of the 
shopping center and in determining the depreciation deduction allowed 
with respect to the shopping center. (See section 167(c)(2).)
    (ii) Interest as a lessee. Section 197 intangibles do not include 
any interest as a lessee under an existing lease of tangible real or 
personal property. For this purpose, an airline lease of an airport 
passenger or cargo gate is a lease of tangible property. The cost of 
acquiring such an interest is taken into account under section 178 and 
Sec. 1.162-11(a). If an interest as a lessee under a lease of tangible 
property is acquired in a transaction with any other intangible 
property, a portion of the total purchase price may be allocable to the 
interest as a lessee based on all of the relevant facts and 
circumstances.
    (9) Interests under indebtedness--(i) In general. Section 197 
intangibles do not include any interest (whether as a creditor or 
debtor) under an indebtedness in existence when the interest was 
acquired. Thus, for example, the value attributable to the assumption 
of an indebtedness with a below-market interest rate is not amortizable 
under section 197. In addition, the premium paid for acquiring a debt 
instrument with an above-market interest rate is not amortizable under 
section 197. See section 171 for rules concerning the treatment of 
amortizable bond premium.
    (ii) Exceptions. For purposes of this paragraph (c)(9), an interest 
under an existing indebtedness does not include the deposit base (and 
other similar items) of a financial institution. An interest under an 
existing indebtedness includes mortgage servicing rights, however, to 
the extent the rights are stripped coupons under section 1286.
    (10) Professional sports franchises. Section 197 intangibles do not 
include any franchise to engage in professional baseball, basketball, 
football, or any other professional sport, and any item (even though 
otherwise qualifying as a section 197 intangible) acquired in 
connection with such a franchise.
    (11) Mortgage servicing rights. Section 197 intangibles do not 
include any right described in section 197(e)(7) (concerning rights to 
service indebtedness secured by residential real property that are not 
acquired as part of a purchase of a trade or business). (See 
Sec. 1.167(a)-14(d) for applicable rules.)
    (12) Certain transaction costs. Section 197 intangibles do not 
include any fees for professional services and any transaction costs 
incurred by parties to a transaction in which all or any portion of the 
gain or loss is not recognized under part III of subchapter C of the 
Internal Revenue Code.
    (13) Rights of fixed duration or amount. (i) Section 197 
intangibles do

[[Page 3831]]

not include any right under a contract or any license, permit, or other 
right granted by a governmental unit if the right--
    (A) Is acquired in the ordinary course of a trade or business (or 
an activity described in section 212) and not as part of a purchase of 
a trade or business;
    (B) Is not described in section 197(d)(1)(A), (B), (E), or (F);
    (C) Is not a customer-based intangible, a customer-related 
information base, or any other similar item; and
    (D) Either--
    (1) Has a fixed duration of less than 15 years; or
    (2) Is fixed as to amount and the adjusted basis thereof is 
properly recoverable (without regard to this section) under a method 
similar to the unit-of-production method.
    (ii) See Sec. 1.167(a)-14(c)(2) and (3) for applicable rules.
    (d) Amortizable section 197 intangibles--(1) Definition. Except as 
otherwise provided in this paragraph (d), the term amortizable section 
197 intangible means any section 197 intangible acquired after August 
10, 1993 (or after July 25, 1991, if a valid retroactive election under 
Sec. 1.197-1T has been made), and held in connection with the conduct 
of a trade or business or an activity described in section 212.
    (2) Exception for self-created intangibles--(i) In general. Except 
as provided in paragraph (d)(2)(iii) of this section, amortizable 
section 197 intangibles do not include any section 197 intangible 
created by the taxpayer (a self-created intangible).
    (ii) Created by the taxpayer--(A) Defined. A section 197 intangible 
is created by the taxpayer to the extent the taxpayer makes payments or 
otherwise incurs costs for its creation, production, development, or 
improvement, whether the actual work is performed by the taxpayer or by 
another person under a contract with the taxpayer entered into before 
the contracted creation, production, development, or improvement 
occurs. For example, a technological process developed specifically for 
a taxpayer under an arrangement with another person pursuant to which 
the taxpayer retains all rights to the process is created by the 
taxpayer.
    (B) Contracts for the use of intangibles. A section 197 intangible 
is not a self-created intangible to the extent that it results from the 
entry into (or renewal of) a contract for the use of an existing 
section 197 intangible. Thus, for example, the exception for self-
created intangibles does not apply to capitalized costs, such as legal 
and other professional fees, incurred by a licensee in connection with 
the entry into (or renewal of) a contract for the use of know-how or 
similar property.
    (C) Improvements and modifications. If an existing section 197 
intangible is improved or otherwise modified by the taxpayer or by 
another person under a contract with the taxpayer, the existing 
intangible and the capitalized costs (if any) of the improvements or 
other modifications are each treated as a separate section 197 
intangible for purposes of this paragraph (d).
    (iii) Exceptions. (A) The exception for self-created intangibles 
does not apply to any section 197 intangible described in section 
197(d)(1)(D) (relating to licenses, permits or other rights granted by 
a governmental unit), 197(d)(1)(E) (relating to covenants not to 
compete), or 197(d)(1)(F) (relating to franchises, trademarks, and 
trade names). Thus, for example, capitalized costs incurred in the 
development, registration, or defense of a trademark or trade name do 
not qualify for the exception and are amortized over 15 years under 
section 197.
    (B) The exception for self-created intangibles does not apply to 
any section 197 intangible created in connection with the purchase of a 
trade or business (as defined in paragraph (e) of this section).
    (C) If a taxpayer disposes of a self-created intangible and 
subsequently reacquires the intangible in an acquisition described in 
paragraph (h)(5)(ii) of this section, the exception for self-created 
intangibles does not apply to the reacquired intangible.
    (3) Exception for property subject to anti-churning rules. 
Amortizable section 197 intangibles do not include any property to 
which the anti-churning rules of section 197(f)(9) and paragraph (h) of 
this section apply.
    (e) Purchase of a trade or business. Several of the exceptions in 
section 197 apply only to property that is not acquired in (or created 
in connection with) a transaction or series of related transactions 
involving the acquisition of assets constituting a trade or business or 
a substantial portion thereof. Property acquired in (or created in 
connection with) such a transaction or series of related transactions 
is referred to in this section as property acquired as part of (or 
created in connection with) a purchase of a trade or business. For 
purposes of section 197 and this section, the applicability of the 
limitation is determined under the following rules:
    (1) Goodwill or going concern value. An asset or group of assets 
constitutes a trade or business or a substantial portion thereof if 
their use would constitute a trade or business under section 1060 (that 
is, if goodwill or going concern value could under any circumstances 
attach to the assets). See Sec. 1.1060-1T(b)(2). For this purpose, all 
the facts and circumstances, including any employee relationships that 
continue (or covenants not to compete that are entered into) as part of 
the transfer of the assets, are taken into account in determining 
whether goodwill or going concern value could attach to the assets.
    (2) Franchise, trademark, or trade name--(i) In general. The 
acquisition of a franchise, trademark, or trade name constitutes the 
acquisition of a trade or business or a substantial portion thereof.
    (ii) Exceptions. For purposes of this paragraph (e)(2)--
    (A) A trademark or trade name is disregarded if it is included in 
computer software under paragraph (c)(4) of this section or in an 
interest in a film, sound recording, video tape, book, or other similar 
property under paragraph (c)(5) of this section;
    (B) A franchise, trademark, or trade name is disregarded if its 
value is nominal or the taxpayer irrevocably disposes of it immediately 
after its acquisition; and
    (C) The acquisition of a right or interest in a trademark or trade 
name is disregarded if the grant of the right or interest is not, under 
the principles of section 1253, a transfer of all substantial rights to 
such property or of an undivided interest in all substantial rights to 
such property.
    (3) Acquisitions to be included. The assets acquired in a 
transaction (or series of related transactions) include only assets 
(including a beneficial or other indirect interest in assets where the 
interest is of a type described in paragraph (c)(1) of this section) 
acquired by the taxpayer and persons related to the taxpayer from 
another person and persons related to that other person. For purposes 
of this paragraph (e)(3), persons are related only if their 
relationship is described in section 267(b) or 707(b) or they are 
engaged in trades or businesses under common control within the meaning 
of section 41(f)(1).
    (4) Substantial portion. The determination of whether acquired 
assets constitute a substantial portion of a trade or business is to be 
based on all of the facts and circumstances, including the nature and 
the amount of the assets acquired as well as the nature and amount of 
the assets retained by the transferor. The value of the assets acquired 
relative to the value of the assets retained by the transferor is not 
determinative of whether the acquired

[[Page 3832]]

assets constitute a substantial portion of a trade or business.
    (5) Deemed asset purchases under section 338. A qualified stock 
purchase that is treated as a purchase of assets under section 338 is 
treated as a transaction involving the acquisition of assets 
constituting a trade or business only if the direct acquisition of the 
assets of the corporation would have been treated as the acquisition of 
assets constituting a trade or business or a substantial portion 
thereof.
    (6) Mortgage servicing rights. Mortgage servicing rights acquired 
in a transaction or series of related transactions are disregarded in 
determining for purposes of paragraph (c)(11) of this section whether 
the assets acquired in the transaction or transactions constitute a 
trade or business or substantial portion thereof.
    (7) Computer software acquired for internal use. Computer software 
acquired in a transaction or series of related transactions solely for 
internal use in an existing trade or business is disregarded in 
determining for purposes of paragraph (c)(4) of this section whether 
the assets acquired in the transaction or series of related 
transactions constitute a trade or business or substantial portion 
thereof.
    (f) Computation of amortization deduction--(1) In general. Except 
as provided in paragraph (f)(2) of this section, the amortization 
deduction allowable under section 197(a) is computed as follows:
    (i) The basis of an amortizable section 197 intangible is amortized 
ratably over the 15-year period beginning on the later of--
    (A) The first day of the month in which the property is acquired; 
or
    (B) In the case of property held in connection with the conduct of 
a trade or business or in an activity described in section 212, the 
first day of the month in which the conduct of the trade or business or 
the activity begins.
    (ii) Except as otherwise provided in this section, basis is 
determined under section 1011 and salvage value is disregarded.
    (iii) Property is not eligible for amortization in the month of 
disposition.
    (iv) The amortization deduction for a short taxable year is based 
on the number of months in the short taxable year.
    (2) Treatment of contingent amounts--(i) Amounts added to basis 
during 15-year period. Any amount that is properly included in the 
basis of an amortizable section 197 intangible after the first month of 
the 15-year period described in paragraph (f)(1)(i) of this section and 
before the expiration of that period is amortized ratably over the 
remainder of the 15-year period. For this purpose, the remainder of the 
15-year period begins on the first day of the month in which the basis 
increase occurs.
    (ii) Amounts becoming fixed after expiration of 15-year period. Any 
amount that is not properly included in the basis of an amortizable 
section 197 intangible until after the expiration of the 15-year period 
described in paragraph (f)(1)(i) of this section is amortized in full 
immediately upon the inclusion of the amount in the basis of the 
intangible.
    (iii) Rules for including amounts in basis. See Secs. 1.1275-
4(c)(4) and 1.483-4(a) for rules governing the extent to which 
contingent amounts payable under a debt instrument given in 
consideration for the sale or exchange of an amortizable section 197 
intangible are treated as payments of principal and the time at which 
the amount treated as principal is included in basis. See Sec. 1.461-
1(a)(1) and (2) for rules governing the time at which other contingent 
amounts are taken into account in determining the basis of an 
amortizable section 197 intangible.
    (3) Basis determinations for certain assets--(i) Covenants not to 
compete. In the case of a covenant not to compete or other similar 
arrangement described in paragraph (b)(9) of this section (a covenant), 
the amount chargeable to capital account includes, except as provided 
in this paragraph (f)(3), all amounts that are required to be paid 
pursuant to the covenant, whether or not any such amount would be 
deductible under section 162 if the covenant were not a section 197 
intangible.
    (ii) Contracts for the use of section 197 intangibles; acquired as 
part of a trade or business--(A) In general. Except as provided in this 
paragraph (f)(3), any amount paid or incurred by the transferee on 
account of the transfer of a right or term interest described in 
paragraph (b)(11) of this section (relating to contracts for the use 
of, and term interests in, section 197 intangibles) by the owner of the 
property to which such right or interest relates and as part of a 
purchase of a trade or business is chargeable to capital account, 
whether or not such amount would be deductible under section 162 if the 
property were not a section 197 intangible.
    (B) Know-how and certain information base. The amount chargeable to 
capital account with respect to a right or term interest described in 
paragraph (b)(11) of this section is determined without regard to the 
rule in paragraph (f)(3)(ii)(A) of this section if the right or 
interest relates to property (other than a customer-related information 
base) described in paragraph (b)(4) or (5) of this section and the 
acquiring taxpayer establishes that--
    (1) The transfer of the right or interest is not, under the 
principles of section 1235, a transfer of all substantial rights to 
such property or of an undivided interest in all substantial rights to 
such property; and
    (2) The right or interest was transferred for an arm's-length 
consideration.
    (iii) Contracts for the use of section 197 intangibles; not 
acquired as part of a trade or business. The transfer of a right or 
term interest described in paragraph (b)(11) of this section by the 
owner of the property to which such right or interest relates but not 
as part of a purchase of a trade or business will be closely 
scrutinized under the principles of section 1235 for purposes of 
determining whether the transfer is a sale or exchange and, 
accordingly, whether amounts paid on account of the transfer are 
chargeable to capital account. If under the principles of section 1235 
the transaction is not a sale or exchange, amounts paid on account of 
the transfer are not chargeable to capital account under this paragraph 
(f)(3).
    (iv) Applicable rules--(A) Franchises, trademarks, and trade names. 
For purposes of this paragraph (f)(3), section 197 intangibles 
described in paragraph (b)(11) of this section do not include any 
property that is also described in paragraph (b)(10) of this section 
(relating to franchises, trademarks, and trade names).
    (B) Certain amounts treated as payable under a debt instrument--(1) 
In general. For purposes of applying any provision of the Internal 
Revenue Code to a person making payments of amounts that are otherwise 
chargeable to capital account under this paragraph (f)(3) and are 
payable after the acquisition of the section 197 intangible to which 
they relate, such amounts are treated as payable under a debt 
instrument given in consideration for the sale or exchange of the 
section 197 intangible.
    (2) Rights granted by governmental units. For purposes of applying 
any provision of the Internal Revenue Code to any amounts that are 
otherwise chargeable to capital account with respect to a license, 
permit, or other right described in paragraph (b)(8) of this section 
(relating to rights granted by a governmental unit or agency or

[[Page 3833]]

instrumentality thereof) and are payable after the acquisition of the 
section 197 intangible to which they relate, such amounts are treated, 
except as provided in paragraph (f)(4)(i) of this section (relating to 
renewal transactions), as payable under a debt instrument given in 
consideration for the sale or exchange of the section 197 intangible.
    (3) Treatment of other parties to transaction. No person shall be 
treated as having sold, exchanged, or otherwise disposed of property in 
a transaction for purposes of any provision of the Internal Revenue 
Code solely by reason of the application of this paragraph (f)(3) to 
any other party to the transaction.
    (4) Basis determinations in certain transactions --(i) Certain 
renewal transactions. The costs paid or incurred for the renewal of a 
franchise, trademark, or trade name or any license, permit, or other 
right granted by a governmental unit or an agency or instrumentality 
thereof are amortized over the 15-year period that begins with the 
month of renewal. Any costs paid or incurred for the issuance, or 
earlier renewal, continue to be taken into account over the remaining 
portion of the amortization period that began at the time of the 
issuance, or earlier renewal. Any amount paid or incurred for the 
protection, expansion, or defense of a trademark or trade name and 
chargeable to capital account is treated as an amount paid or incurred 
for a renewal.
    (ii) Transactions subject to section 338 or 1060. In the case of a 
section 197 intangible deemed to have been acquired as the result of a 
qualified stock purchase within the meaning of section 338(d)(3), the 
basis shall be determined pursuant to section 338(b)(5) and the 
regulations thereunder. In the case of a section 197 intangible 
acquired in an applicable asset acquisition within the meaning of 
section 1060(c), the basis shall be determined pursuant to section 
1060(a) and the regulations thereunder.
    (iii) Certain reinsurance transactions. See paragraph (g)(5)(ii) of 
this section for special rules regarding the adjusted basis of an 
insurance contract acquired through an assumption reinsurance 
transaction.
    (g) Special rules--(1) Treatment of certain dispositions--(i) Loss 
disallowance rules--(A) In general. No loss is recognized on the 
disposition of an amortizable section 197 intangible if the taxpayer 
has any retained intangibles. The retained intangibles with respect to 
the disposition of any amortizable section 197 intangible (the 
transferred intangible) are all amortizable section 197 intangibles, or 
rights to use or interests (including beneficial or other indirect 
interests) in amortizable section 197 intangibles (including the 
transferred intangible) that were acquired in the same transaction or 
series of related transactions as the transferred intangible and are 
retained after its disposition. Except as otherwise provided in 
paragraph (g)(1)(iv)(B) of this section, the adjusted basis of each of 
the retained intangibles is increased by the product of--
    (1) The loss that is not recognized solely by reason of this rule; 
and
    (2) A fraction, the numerator of which is the adjusted basis of the 
retained intangible on the date of the disposition and the denominator 
of which is the total adjusted bases of all the retained intangibles on 
that date.
    (B) Abandonment or worthlessness. The abandonment of an amortizable 
section 197 intangible, or any other event rendering an amortizable 
section 197 intangible worthless, is treated as a disposition of the 
intangible for purposes of this paragraph (g)(1), and the abandoned or 
worthless intangible is disregarded (that is, it is not treated as a 
retained intangible) for purposes of applying this paragraph (g)(1) to 
the subsequent disposition of any other amortizable section 197 
intangible.
    (C) Certain nonrecognition transfers. The loss disallowance rule in 
paragraph (g)(1)(i)(A) of this section also applies when a taxpayer 
transfers an amortizable section 197 intangible from an acquired trade 
or business in a transaction in which the intangible is transferred 
basis property and, after the transfer, retains other amortizable 
section 197 intangibles from the trade or business. Thus, for example, 
the transfer of an amortizable section 197 intangible to a corporation 
in exchange for stock in the corporation in a transaction described in 
section 351, or to a partnership in exchange for an interest in the 
partnership in a transaction described in section 721, when other 
amortizable section 197 intangibles acquired in the same transaction 
are retained, followed by a sale of the stock or partnership interest 
received, will not avoid the application of the loss disallowance 
provision to the extent the adjusted basis of the transferred 
intangible at the time of the sale exceeds its fair market value at 
that time.
    (ii) Separately acquired property. Paragraph (g)(1)(i) of this 
section does not apply to an amortizable section 197 intangible that is 
not acquired in a transaction or series of related transactions in 
which the taxpayer acquires other amortizable section 197 intangibles 
(a separately acquired intangible). Consequently, a loss may be 
recognized upon the disposition of a separately acquired amortizable 
section 197 intangible. However, the termination or worthlessness of 
only a portion of an amortizable section 197 intangible is not the 
disposition of a separately acquired intangible. For example, neither 
the loss of several customers from an acquired customer list nor the 
worthlessness of only some information from an acquired data base 
constitutes the disposition of a separately acquired intangible.
    (iii) Disposition of a covenant not to compete. If a covenant not 
to compete or any other arrangement having substantially the same 
effect is entered into in connection with the direct or indirect 
acquisition of an interest in one or more trades or businesses, the 
disposition or worthlessness of the covenant or other arrangement will 
not be considered to occur until the disposition or worthlessness of 
all interests in those trades or businesses. For example, a covenant 
not to compete entered into in connection with the purchase of stock 
continues to be amortized ratably over the 15-year recovery period 
(even after the covenant expires or becomes worthless) unless all the 
trades or businesses in which an interest was acquired through the 
stock purchase (or all the purchaser's interests in those trades or 
businesses) also are disposed of or become worthless.
    (iv) Taxpayers under common control--(A) In general. Except as 
provided in paragraph (g)(1)(iv)(B) of this section, all persons that 
would be treated as a single taxpayer under section 41(f)(1) are 
treated as a single taxpayer under this paragraph (g)(1). Thus, for 
example, a loss is not recognized on the disposition of an amortizable 
section 197 intangible by a member of a controlled group of 
corporations (as defined in section 41(f)(5)) if, after the 
disposition, another member retains other amortizable section 197 
intangibles acquired in the same transaction as the amortizable section 
197 intangible that has been disposed of.
    (B) Treatment of disallowed loss. If retained intangibles are held 
by a person other than the person incurring the disallowed loss, only 
the adjusted basis of intangibles retained by the person incurring the 
disallowed loss is increased, and only the adjusted basis of those 
intangibles is included in the denominator of the fraction described in 
paragraph (g)(1)(i)(A) of this section. If none of the retained 
intangibles are held by the person incurring the disallowed loss, the 
loss is allowed ratably, as a deduction under section 197, over the 
remainder of the period during which

[[Page 3834]]

the intangible giving rise to the loss would have been amortizable, 
except that any remaining disallowed loss is allowed in full on the 
first date on which all other retained intangibles have been disposed 
of or become worthless.
    (2) Treatment of certain nonrecognition and exchange transactions--
(i) Relationship to anti-churning rules. This paragraph (g)(2) provides 
rules relating to the treatment of section 197 intangibles acquired in 
certain transactions. If these rules apply to a section 197(f)(9) 
intangible (within the meaning of paragraph (h)(1)(i) of this section), 
the intangible is, notwithstanding its treatment under this paragraph 
(g)(2), treated as an amortizable section 197 intangible only to the 
extent permitted under paragraph (h) of this section.
    (ii) Treatment of nonrecognition and exchange transactions 
generally--(A) Transfer disregarded. If a section 197 intangible is 
transferred in a transaction described in paragraph (g)(2)(ii)(C) of 
this section, the transfer is disregarded in determining--
    (1) Whether, with respect to so much of the intangible's basis in 
the hands of the transferee as does not exceed its basis in the hands 
of the transferor, the intangible is an amortizable section 197 
intangible; and
    (2) The amount of the deduction under section 197 with respect to 
such basis.
    (B) Application of general rule. If the intangible described in 
paragraph (g)(2)(ii)(A) of this section was an amortizable section 197 
intangible in the hands of the transferor, the transferee will continue 
to amortize its adjusted basis, to the extent it does not exceed the 
transferor's adjusted basis, ratably over the remainder of the 
transferor's 15-year amortization period. If the intangible was not an 
amortizable section 197 intangible in the hands of the transferor, the 
transferee's adjusted basis, to the extent it does not exceed the 
transferor's adjusted basis, cannot be amortized under section 197. In 
either event, the intangible is treated, with respect to so much of its 
adjusted basis in the hands of the transferee as exceeds its adjusted 
basis in the hands of the transferor, in the same manner for purposes 
of section 197 as an intangible acquired from the transferor in a 
transaction that is not described in paragraph (g)(2)(ii)(C) of this 
section. The rules of this paragraph (g)(2)(ii) also apply to any 
subsequent transfers of the intangible in a transaction described in 
paragraph (g)(2)(ii)(C) of this section.
    (C) Transactions covered. The transactions described in this 
paragraph (g)(2)(ii)(C) are--
    (1) Any transaction described in section 332, 351, 361, 721, or 
731; and
    (2) Any transaction between corporations that are members of the 
same consolidated group immediately after the transaction.
    (iii) Certain exchanged-basis property. This paragraph (g)(2)(iii) 
applies to property that is acquired in a transaction subject to 
section 1031 or 1033 and is permitted to be acquired without 
recognition of gain (replacement property). Replacement property is 
treated as if it were the property by reference to which its basis is 
determined (the predecessor property) in determining whether, with 
respect to so much of its basis as does not exceed the basis of the 
predecessor property, the replacement property is an amortizable 
section 197 intangible and the amortization period under section 197 
with respect to such basis. Thus, if the predecessor property was an 
amortizable section 197 intangible, the taxpayer will amortize the 
adjusted basis of the replacement property, to the extent it does not 
exceed the adjusted basis of the predecessor property, ratably over the 
remainder of the 15-year amortization period for the predecessor 
property. If the predecessor property was not an amortizable section 
197 intangible, the adjusted basis of the replacement property, to the 
extent it does not exceed the adjusted basis of the predecessor 
property, may not be amortized under section 197. In either event, the 
replacement property is treated, with respect to so much of its 
adjusted basis as exceeds the adjusted basis of the predecessor 
property, in the same manner for purposes of section 197 as property 
acquired from the transferor in a transaction that is not subject to 
section 1031 or 1033.
    (iv) Transfers under section 708(b)(1)--(A) In general. Paragraph 
(g)(2)(ii) of this section applies to transfers of section 197 
intangibles that occur or are deemed to occur by reason of the 
termination of a partnership under section 708(b)(1).
    (B) Termination by sale or exchange of interest. In applying 
paragraph (g)(2)(ii) of this section to a partnership that is 
terminated pursuant to section 708(b)(1)(B) (relating to deemed 
terminations from the sale or exchange of an interest), the terminated 
partnership is treated as the transferor and the new partnership is 
treated as the transferee with respect to any section 197 intangible 
held by the terminated partnership immediately preceding the 
termination. (See paragraph (g)(3) of this section for the treatment of 
increases in the bases of property of the terminated partnership under 
section 743(b).)
    (C) Other terminations. In applying paragraph (g)(2)(ii) of this 
section to a partnership that is terminated pursuant to section 
708(b)(1)(A) (relating to cessation of activities by a partnership), 
the terminated partnership is treated as the transferor and the 
distributee partner is treated as the transferee with respect to any 
section 197 intangible held by the terminated partnership immediately 
preceding the termination.
    (3) Increase in the basis of partnership property under section 
732(b), 734(b), 743(b), or 732(d). Any increase in the adjusted basis 
of a section 197 intangible under sections 732(b) or 732(d) (relating 
to a partner's basis in property distributed by a partnership), section 
734(b) (relating to the optional adjustment to the basis of 
undistributed partnership property after a distribution of property to 
a partner), or section 743(b) (relating to the optional adjustment to 
the basis of partnership property after transfer of a partnership 
interest) is treated as a separate section 197 intangible. For purposes 
of determining the amortization period under section 197 with respect 
to the basis increase, the intangible is treated as having been 
acquired at the time of the transaction that causes the basis increase. 
The provisions of paragraph (f)(2) of this section apply to the extent 
that the amount of the basis increase is determined by reference to 
contingent payments. For purposes of the effective date and anti-
churning provisions (paragraphs (l)(1) and (h) of this section) for a 
basis increase under section 732(d), the intangible is treated as 
having been acquired by the transferee partner at the time of the 
transfer of the partnership interest described in section 732(d).
    (4) Section 704(c) allocations --(i) Allocations where the 
intangible is amortizable by the contributor. To the extent that the 
intangible was an amortizable section 197 intangible in the hands of 
the contributing partner, a partnership may make allocations of 
amortization deductions with respect to the intangible to all of its 
partners under either the curative or remedial allocation methods 
described in the regulations under section 704(c). See Sec. 1.704-3(c) 
and (d).
    (ii) Allocations where the intangible is not amortizable by the 
contributor. To the extent that the intangible was not an amortizable 
section 197 intangible in the hands of the contributing partner, the 
intangible is not amortizable by the partnership. However, if a partner

[[Page 3835]]

contributes a section 197 intangible to a partnership and the 
partnership adopts the remedial allocation method for making section 
704(c) allocations of amortization deductions, the partnership 
generally may make remedial allocations of amortization deductions with 
respect to the contributed section 197 intangible in accordance with 
Sec. 1.704-3(d). See paragraph (h)(12) of this section to determine the 
application of the anti-churning rules in the context of remedial 
allocations.
    (5) Treatment of certain reinsurance transactions--(i) In general. 
Section 197 applies to any insurance contract acquired from another 
person through an assumption reinsurance transaction. For purposes of 
section 197, an assumption reinsurance transaction is--
    (A) Any arrangement in which one insurance company (the reinsurer) 
becomes solely liable to policyholders on contracts transferred by 
another insurance company (the ceding company); and
    (B) Any acquisition of an insurance contract that is treated as 
occurring by reason of an election under section 338.
    (ii) Determination of adjusted basis--(A) Acquisitions (other than 
under section 338) of specified insurance contracts. The amount taken 
into account for purposes of section 197 as the adjusted basis of 
specified insurance contracts (as defined in section 848(e)(1)) 
acquired in an assumption reinsurance transaction that is not described 
in paragraph (g)(5)(i)(B) of this section is equal to the excess of--
    (1) The amount paid or incurred (or treated as having been paid or 
incurred) by the reinsurer for the purchase of the contracts (as 
determined under Sec. 1.817-4(d)(2)); over
    (2) The amount of the specified policy acquisition expenses that 
are attributable to the reinsurer's net positive consideration for the 
reinsurance agreement (as determined under Sec. 1.848-2(f)(3)).
    (B) Insolvent ceding company. The reduction of the amount of 
specified policy acquisition expenses by the reinsurer with respect to 
an assumption reinsurance transaction with an insolvent ceding company 
where the ceding company and reinsurer have made a valid joint election 
under section 1.848-2(i)(4) is disregarded in determining the amount of 
specified policy acquisition expenses for purposes of this paragraph 
(g)(5)(ii).
    (C) Other acquisitions. [Reserved]
    (6) Amounts paid or incurred for a franchise, trademark, or trade 
name. If an amount to which section 1253(d) (relating to the transfer, 
sale, or other disposition of a franchise, trademark, or trade name) 
applies is described in section 1253(d)(1)(B) (relating to contingent 
serial payments deductible under section 162), the amount is not 
included in the adjusted basis of the intangible for purposes of 
section 197. Any other amount, whether fixed or contingent, to which 
section 1253(d) applies is chargeable to capital account under section 
1253(d)(2) and is amortizable only under section 197.
    (7) Amounts properly taken into account in determining the cost of 
property that is not a section 197 intangible. Section 197 does not 
apply to an amount that is properly taken into account in determining 
the cost of property that is not a section 197 intangible. The entire 
cost of acquiring the other property is included in its basis and 
recovered under other applicable Internal Revenue Code provisions. 
Thus, for example, section 197 does not apply to the cost of an 
interest in computer software to the extent such cost is included, 
without being separately stated, in the cost of the hardware or other 
tangible property and is consistently treated as part of the cost of 
the hardware or other tangible property.
    (8) Treatment of amortizable section 197 intangibles as depreciable 
property. An amortizable section 197 intangible is treated as property 
of a character subject to the allowance for depreciation under section 
167. Thus, for example, an amortizable section 197 intangible is not a 
capital asset for purposes of section 1221, but if used in a trade or 
business and held for more than one year, gain or loss on its 
disposition generally qualifies as section 1231 gain or loss. Also, an 
amortizable section 197 intangible is section 1245 property and section 
1239 applies to any gain recognized upon its sale or exchange between 
related persons (as defined in section 1239(b)).
    (h) Anti-churning rules--(1) Scope and purpose--(i) Scope. This 
paragraph (h) applies to section 197(f)(9) intangibles. For this 
purpose, section 197(f)(9) intangibles are goodwill and going concern 
value that was held or used at any time during the transition period 
and any other section 197 intangible that was held or used at any time 
during the transition period and was not depreciable or amortizable 
under prior law.
    (ii) Purpose. To qualify as an amortizable section 197 intangible, 
a section 197 intangible must be acquired after the applicable date 
(July 25, 1991, if the acquiring taxpayer has made a valid retroactive 
election pursuant to Sec. 1.197-1T; August 10, 1993, in all other 
cases). The purpose of the anti-churning rules of section 197(f)(9) and 
this paragraph (h) is to prevent the amortization of section 197(f)(9) 
intangibles unless they are transferred after the applicable effective 
date in a transaction giving rise to a significant change in ownership 
or use. (Special rules apply for purposes of determining whether 
transactions involving partnerships give rise to a significant change 
in ownership or use. See paragraph (h)(12) of this section.) The anti-
churning rules are to be applied in a manner that carries out their 
purpose.
    (2) Treatment of section 197(f)(9) intangibles. Except as otherwise 
provided in this paragraph (h), a section 197(f)(9) intangible acquired 
by a taxpayer after the applicable effective date does not qualify for 
amortization under section 197 if--
    (i) The taxpayer or a related person held or used the intangible or 
an interest therein at any time during the transition period;
    (ii) The taxpayer acquired the intangible from a person that held 
the intangible at any time during the transition period and, as part of 
the transaction, the user of the intangible does not change; or
    (iii) The taxpayer grants the right to use the intangible to a 
person that held or used the intangible at any time during the 
transition period (or to a person related to that person), but only if 
the transaction in which the taxpayer grants the right and the 
transaction in which the taxpayer acquired the intangible are part of a 
series of related transactions.
    (3) Amounts deductible under section 1253(d) or Sec. 1.162-11. For 
purposes of this paragraph (h), deductions allowable under section 
1253(d)(2) or pursuant to an election under section 1253(d)(3) (in 
either case as in effect prior to the enactment of section 197) and 
deductions allowable under Sec. 1.162-11 are treated as deductions 
allowable for amortization under prior law.
    (4) Transition period. For purposes of this paragraph (h), the 
transition period is July 25, 1991, if the acquiring taxpayer has made 
a valid retroactive election pursuant to Sec. 1.197-1T and the period 
beginning on July 25, 1991, and ending on August 10, 1993, in all other 
cases.
    (5) Exceptions. The anti-churning rules of this paragraph (h) do 
not apply to--
    (i) The acquisition of a section 197(f)(9) intangible if the 
acquiring taxpayer's basis in the intangible is determined under 
section 1014(a); or
    (ii) The acquisition of a section 197(f)(9) intangible that was an

[[Page 3836]]

amortizable section 197 intangible in the hands of the seller (or 
transferor), but only if the acquisition transaction and the 
transaction in which the seller (or transferor) acquired the intangible 
or interest therein are not part of a series of related transactions.
    (6) Related person--(i) In general. Except as otherwise provided in 
paragraph (h)(6)(ii) of this section, a person is related to another 
person for purposes of this paragraph (h) if--
    (A) The person bears a relationship to that person that would be 
specified in section 267(b) (determined without regard to section 
267(e)) and, by substitution, section 267(f)(1), if those sections were 
amended by substituting 20 percent for 50 percent; or
    (B) The person bears a relationship to that person that would be 
specified in section 707(b)(1) if that section were amended by 
substituting 20 percent for 50 percent; or
    (C) The persons are engaged in trades or businesses under common 
control (within the meaning of section 41(f)(1) (A) and (B)).
    (ii) Time for testing relationships. Except as provided in 
paragraph (h)(6)(iii) of this section, a person is treated as related 
to another person for purposes of this paragraph (h) if the 
relationship exists--
    (A) In the case of a single transaction, immediately before or 
immediately after the transaction in which the intangible is acquired; 
and
    (B) In the case of a series of related transactions (or a series of 
transactions that together comprise a qualified stock purchase within 
the meaning of section 338(d)(3)), immediately before the earliest such 
transaction or immediately after the last such transaction.
    (iii) Certain relationships disregarded. In applying the rules in 
paragraph (h)(7) of this section, if a person acquires an intangible in 
a series of related transactions in which the person acquires stock 
(meeting the requirements of section 1504(a)(2)) of a corporation in a 
fully taxable transaction followed by a liquidation of the acquired 
corporation under section 331, any relationship created as part of such 
series of transactions is disregarded in determining whether any person 
is related to such acquired corporation immediately after the last 
transaction.
    (iv) De minimis rule--(A) In general. Two corporations are not 
treated as related persons for purposes of this paragraph (h) if--
    (1) The corporations would (but for the application of this 
paragraph (h)(6)(iv)) be treated as related persons solely by reason of 
substituting ``more than 20 percent'' for ``more than 50 percent'' in 
section 267(f)(1)(A); and
    (2) The beneficial ownership interest of each corporation in the 
stock of the other corporation represents less than 10 percent of the 
total combined voting power of all classes of stock entitled to vote 
and less than 10 percent of the total value of the shares of all 
classes of stock outstanding.
    (B) Determination of beneficial ownership interest. For purposes of 
this paragraph (h)(6)(iv), the beneficial ownership interest of one 
corporation in the stock of another corporation is determined under the 
principles of section 318(a), except that--
    (1) In applying section 318(a)(2)(C), the 50-percent limitation 
contained therein is not applied; and
    (2) Section 318(a)(3)(C) is applied by substituting ``20 percent'' 
for ``50 percent''.
    (7) Special rules for entities that owned or used property at any 
time during the transition period and that are no longer in existence. 
A corporation, partnership, or trust that owned or used a section 197 
intangible at any time during the transition period and that is no 
longer in existence is deemed, for purposes of determining whether a 
taxpayer acquiring the intangible is related to such entity, to be in 
existence at the time of the acquisition.
    (8) Special rules for section 338 deemed acquisitions. In the case 
of a qualified stock purchase that is treated as a deemed sale and 
purchase of assets pursuant to section 338, the corporation treated as 
purchasing assets as a result of an election thereunder (new target) is 
not considered the person that held or used the assets during any 
period in which the assets were held or used by the corporation treated 
as selling the assets (old target). Thus, for example, if a corporation 
(the purchasing corporation) makes a qualified stock purchase of the 
stock of another corporation after the transition period, new target 
will not be treated as the owner during the transition period of assets 
owned by old target during that period even if old target and new 
target are treated as the same corporation for certain other purposes 
of the Internal Revenue Code or old target and new target are the same 
corporation under the laws of the State or other jurisdiction of its 
organization. However, the anti-churning rules of this paragraph (h) 
may nevertheless apply to a deemed asset purchase resulting from a 
section 338 election if new target is related (within the meaning of 
paragraph (h)(6) of this section) to old target.
    (9) Gain-recognition exception--(i) Applicability. A section 
197(f)(9) intangible qualifies for the gain-recognition exception if--
    (A) The taxpayer acquires the intangible from a person that would 
not be related to the taxpayer but for the substitution of 20 percent 
for 50 percent under paragraph (h)(6)(i)(A) of this section; and
    (B) That person (whether or not otherwise subject to Federal income 
tax) elects to recognize gain on the disposition of the intangible and 
agrees, notwithstanding any other provision of law or treaty, to pay 
for the taxable year in which the disposition occurs an amount of tax 
on the gain that, when added to any other Federal income tax on such 
gain, equals the gain on the disposition multiplied by the highest 
marginal rate of tax for that taxable year.
    (ii) Effect of exception. The anti-churning rules of this paragraph 
(h) apply to a section 197(f)(9) intangible that qualifies for the 
gain-recognition exception only to the extent the acquiring taxpayer's 
basis in the intangible exceeds the gain recognized by the transferor.
    (iii) Time and manner of election. The election described in this 
paragraph (h)(9) must be made by the due date (including extensions of 
time) of the electing taxpayer's Federal income tax return for the 
taxable year in which the disposition occurs. The election is made by 
attaching an election statement satisfying the requirements of 
paragraph (h)(9)(viii) of this section to the electing taxpayer's 
original or amended income tax return for that taxable year (or by 
filing the statement as a return for the taxable year under paragraph 
(h)(9)(xi) of this section). In addition, the taxpayer must satisfy the 
notification requirements of paragraph (h)(9)(vi) of this section. The 
election is binding on the taxpayer and all parties whose Federal tax 
liability is affected by the election.
    (iv) Special rules for certain entities. In the case of a 
partnership, S corporation, estate or trust, the election under this 
paragraph (h)(9) is made by the entity rather than by its owners or 
beneficiaries. If a partnership or S corporation makes an election 
under this paragraph (h)(9) with respect to the disposition of a 
section 197(f)(9) intangible, each of its partners or shareholders is 
required to pay a tax determined in the manner described in paragraph 
(h)(9)(i)(B) of this section on the amount of gain that is properly 
allocable to such partner or shareholder with respect to the 
disposition.
    (v) Effect of nonconforming elections. An attempted election that 
does not

[[Page 3837]]

substantially comply with each of the requirements of this paragraph 
(h)(9) is disregarded in determining whether a section 197(f)(9) 
intangible qualifies for the gain-recognition exception.
    (vi) Notification requirements. A taxpayer making an election under 
this paragraph (h)(9) with respect to the disposition of a section 
197(f)(9) intangible must provide written notification of the election 
on or before the due date of the return on which the election is made 
to the person acquiring the section 197 intangible. In addition, a 
partnership or S corporation making an election under this paragraph 
(h)(9) must attach to the Schedule K-1 furnished to each partner or 
shareholder a written statement containing all information necessary to 
determine the recipient's additional tax liability under this paragraph 
(h)(9).
    (vii) Revocation. An election under this paragraph (h)(9) may be 
revoked only with the consent of the Commissioner.
    (viii) Election Statement. An election statement satisfies the 
requirements of this paragraph (h)(9)(viii) if it is in writing and 
contains the information listed below. The required information should 
be arranged and identified in accordance with the following order and 
numbering system:
    (A) The name and address of the electing taxpayer.
    (B) Except in the case of a taxpayer that is not otherwise subject 
to Federal income tax, the taxpayer identification number (TIN) of the 
electing taxpayer.
    (C) A statement that the taxpayer is making the election under 
section 197(f)(9)(B).
    (D) Identification of the transaction and each person that is a 
party to the transaction or whose tax return is affected by the 
election (including, except in the case of persons not otherwise 
subject to Federal income tax, the TIN of each such person).
    (E) The calculation of the gain realized, the applicable rate of 
tax, and the amount of the taxpayer's additional tax liability under 
this paragraph (h)(9).
    (F) The signature of the taxpayer or an individual authorized to 
sign the taxpayer's Federal income tax return.
    (ix) Determination of highest marginal rate of tax and amount of 
other Federal income tax on gain--(A) Marginal rate. The following 
rules apply for purposes of determining the highest marginal rate of 
tax applicable to an electing taxpayer:
    (1) Noncorporate taxpayers. In the case of an individual, estate, 
or trust, the highest marginal rate of tax is the highest marginal rate 
of tax in effect under section 1, determined without regard to section 
1(h).
    (2) Corporations and tax-exempt entities. In the case of a 
corporation or an entity that is exempt from tax under section 501(a), 
the highest marginal rate of tax is the highest marginal rate of tax in 
effect under section 11, determined without regard to any rate that is 
added to the otherwise applicable rate in order to offset the effect of 
the graduated rate schedule.
    (B) Other Federal income tax on gain. The amount of Federal income 
tax (other than the tax determined under this paragraph (h)(9)) imposed 
on any gain is the lesser of--
    (1) The amount by which the taxpayer's Federal income tax liability 
(determined without regard to this paragraph (h)(9)) would be reduced 
if the amount of such gain were not taken into account; or
    (2) The amount of the gain multiplied by the highest marginal rate 
of tax for the taxable year.
    (x) Coordination with other provisions--(A) In general. The amount 
of gain subject to the tax determined under this paragraph (h)(9) is 
not reduced by any net operating loss deduction under section 172(a), 
any capital loss under section 1212, or any other similar loss or 
deduction. In addition, the amount of tax determined under this 
paragraph (h)(9) is not reduced by any credit of the taxpayer. In 
computing the amount of any net operating loss, capital loss, or other 
similar loss or deduction, or any credit that may be carried to any 
taxable year, any gain subject to the tax determined under this 
paragraph (h)(9) and any tax paid under this paragraph (h)(9) is not 
taken into account.
    (B) Section 1374. No provision of paragraph (h)(9)(iv) of this 
section precludes the application of section 1374 (relating to a tax on 
certain built-in gains of S corporations) to any gain with respect to 
which an election under this paragraph (h)(9) is made. In addition, 
neither paragraph (h)(9)(iv) nor paragraph (h)(9)(x)(A) of this section 
precludes a taxpayer from applying the provisions of section 1366(f)(2) 
(relating to treatment of the tax imposed by section 1374 as a loss 
sustained by the S corporation) in determining the amount of tax 
payable under paragraph (h)(9) of this section.
    (C) Procedural and administrative provisions. For purposes of 
subtitle F, the amount determined under this paragraph (h)(9) is 
treated as a tax imposed by section 1 or 11, as appropriate.
    (D) Installment method. The gain subject to the tax determined 
under paragraph (h)(9)(i) of this section may not be reported under the 
method described in section 453(a). Any such gain that would, but for 
the application of this paragraph (h)(9)(x)(D), be taken into account 
under section 453(a) shall be taken into account in the same manner as 
if an election under section 453(d) (relating to the election not to 
apply section 453(a)) had been made.
    (xi) Special rules for persons not otherwise subject to Federal 
income tax. If the person making the election under this paragraph 
(h)(9) with respect to a disposition is not otherwise subject to 
Federal income tax, the election statement satisfying the requirements 
of paragraph (h)(9)(viii) of this section must be filed with the 
Philadelphia Service Center. For purposes of this paragraph (h)(9) and 
subtitle F, the statement is treated as an income tax return for the 
calendar year in which the disposition occurs and as a return due on or 
before March 15 of the following year.
    (10) Transactions subject to both anti-churning and nonrecognition 
rules. If a person acquires a section 197(f)(9) intangible in a 
transaction described in paragraph (g)(2) of this section from a person 
in whose hands the intangible was an amortizable section 197 
intangible, and immediately after the transaction (or series of 
transactions described in paragraph (h)(6)(ii)(B) of this section) in 
which such intangible is acquired, the person acquiring the section 
197(f)(9) intangible is related to any person described in paragraph 
(h)(2) of this section, the intangible is, notwithstanding its 
treatment under paragraph (g)(2) of this section, treated as an 
amortizable section 197 intangible only to the extent permitted under 
this paragraph (h). (See, for example, paragraph (h)(5)(ii) of this 
section.)
    (11) Avoidance purpose. A section 197(f)(9) intangible acquired by 
a taxpayer after the applicable effective date does not qualify for 
amortization under section 197 if one of the principal purposes of the 
transaction in which it is acquired is to avoid the operation of the 
anti-churning rules of section 197(f)(9) and this paragraph (h). A 
transaction will be presumed to have a principal purpose of avoidance 
if it does not effect a significant change in the ownership or use of 
the intangible. Thus, for example, if section 197(f)(9) intangibles are 
acquired in a transaction (or series of related transactions) in which 
an option to acquire stock is issued to a party to the transaction, but 
the option is not treated as having been exercised for purposes of 
paragraph (h)(6) of this section, this paragraph (h)(11) may apply to 
the transaction.
    (12) Additional partnership anti-churning rules--(i) In general. In

[[Page 3838]]

determining whether the anti-churning rules of this paragraph (h) apply 
to any increase in the basis of a section 197(f)(9) intangible under 
section 732(b), 732(d), 734(b), or 743(b), the determinations are made 
at the partner level and each partner is treated as having owned and 
used the partner's proportionate share of partnership property. In 
determining whether the anti-churning rules of this paragraph (h) apply 
to any transaction under another section of the Internal Revenue Code, 
the determinations are made at the partnership level, unless under 
Sec. 1.701-2(e) the Commissioner determines that the partner level is 
more appropriate.
    (ii) Section 732(b) adjustments--Reserved.
    (iii) Section 732(d) adjustments. The anti-churning rules of this 
paragraph (h) do not apply to an increase in the basis of partnership 
property under section 732(d) if the distributee partner was not 
related (at the time of the transfer of the partnership interest) to 
the person who transferred the partnership interest with respect to 
which the distribution is being made.
    (iv) Section 734(b) adjustments--Reserved.
    (v) Section 743(b) adjustments. The anti-churning rules of this 
paragraph (h) do not apply to an increase in the basis of partnership 
property under section 743(b) if the person acquiring the partnership 
interest is not related to the person transferring the partnership 
interest.
    (vi) Partner is or becomes a user of partnership intangible--(A) 
General rule. If, as part of a series of related transactions that 
includes a transaction described in paragraph (h)(12) (iii) or (v) of 
this section, an anti-churning partner or a person related to an anti-
churning partner becomes (or remains) a user of an intangible that is 
treated as transferred in the transaction (as a result of the partners 
being treated as having owned their proportionate share of partnership 
assets), the anti-churning rules of this paragraph (h) apply to the 
proportionate share of such intangible that is treated as transferred 
by the anti-churning partner, notwithstanding the application of 
paragraph (h)(12) (iii) or (v) of this section.
    (B) Anti-churning partner. For purposes of this paragraph 
(h)(12)(vi), anti-churning partner means--
    (1) With respect to all intangibles held by a partnership on or 
before August 10, 1993, any partner, but only to the extent that
    (i) The partner's interest in the partnership was acquired on or 
before August 10, 1993, or
    (ii) The interest was acquired from a person related to the partner 
on or after August 10, 1993, and such interest was not held by any 
person other than persons related to such partner at any time after 
August 10, 1993 (disregarding, for this purpose, a person's holding of 
an interest if the acquisition of such interest was part of a 
transaction or series of related transactions in which the partner or 
persons related to the partner subsequently acquired such interest),
    (2) With respect to any section 197(f)(9) intangible acquired by a 
partnership after August 10, 1993, that is not amortizable with respect 
to the partnership, any partner, but only to the extent that
    (i) The partner's interest in the partnership was acquired on or 
before the date the partnership acquired the section 197(f)(9) 
intangible, or
    (ii) The interest was acquired from a person related to the partner 
on or after the date the partnership acquired the section 197(f)(9) 
intangible, and such interest was not held by any person other than 
persons related to such partner at any time after the date the 
partnership acquired the section 197(f)(9) intangible (disregarding, 
for this purpose, a person's holding of an interest if the acquisition 
of such interest was part of a transaction or series of related 
transactions in which the partner or persons related to the partner 
subsequently acquired such interest), and
    (3) With respect to any intangible, a partner who received an 
interest in the partnership in exchange for such intangible (or a 
portion thereof) or a related person who received such interest in the 
partnership from such a partner, but only to the extent that the 
intangible (or portion thereof) transferred by such partner is not an 
amortizable section 197 intangible with respect to the partnership.
    (C) Effect of retroactive elections. For purposes of paragraph 
(h)(12)(vi)(B) of this section, references to August 10, 1993, are 
treated as references to July 25, 1991, if the relevant party made a 
valid retroactive election under Sec. 1.197-1T.
    (vii) Section 704(c) allocations--(A) Allocations where the 
intangible is amortizable by the contributor. The anti-churning rules 
of this paragraph (h) do not apply to the curative or remedial 
allocations of amortization with respect to a section 197(f)(9) 
intangible if the intangible was an amortizable section 197 intangible 
in the hands of the contributing partner (unless paragraph (h)(10) of 
this section applies so as to cause the intangible to cease to be an 
amortizable section 197 intangible in the hands of the partnership).
    (B) Allocations where the intangible is not amortizable by the 
contributor. Notwithstanding paragraph (g)(3)(ii) of this section, 
where the section 197(f)(9) intangible was not an amortizable section 
197 intangible in the hands of the contributing partner, a partner may 
not receive remedial allocations of amortization under section 704(c) 
that are deductible for Federal income tax purposes if that partner is 
related to the partner that contributed the intangible. Taxpayers may 
use any reasonable method to determine amortization of the asset for 
book purposes, provided that the method used does not contravene the 
purposes of the anti-churning rules under section 197 and this 
paragraph (h). A method will be considered to contravene the purposes 
of the anti-churning rules if the effect of the book adjustments 
resulting from the method is such that any portion of the tax deduction 
for amortization attributable to section 704(c) is allocated, directly 
or indirectly, to a partner who is subject to the anti-churning rules 
with respect to such adjustment.
    (viii) Operating rule for transfers upon death. For purposes of 
this paragraph (h)(12), if the basis of a partner's interest in a 
partnership is determined under section 1014(a), such partner is 
treated as acquiring such interest from a person who is not related to 
such partner, and such interest is treated as having previously been 
held by a person who is not related to such partner.
    (i) [Reserved]
    (j) General anti-abuse rule. The Commissioner will interpret and 
apply the rules in this section as necessary and appropriate to prevent 
avoidance of the purposes of section 197. If one of the principal 
purposes of a transaction is to achieve a tax result that is 
inconsistent with the purposes of section 197, the Commissioner will 
recast the transaction for Federal tax purposes as appropriate to 
achieve tax results that are consistent with the purposes of section 
197, in light of the applicable statutory and regulatory provisions and 
the pertinent facts and circumstances.
    (k) Examples.The following examples illustrate the application of 
this section:

    Example 1. Advertising costs. (i) Q manufactures and sells 
consumer products through a series of wholesalers and distributors. 
In order to increase sales of its products by encouraging consumer 
loyalty to its products and to enhance the value of the goodwill, 
trademarks, and trade names of the business, Q advertises its 
products to the consuming public. It regularly incurs costs to 
develop radio, television, and print advertisements. These costs 
generally consist

[[Page 3839]]

of employee costs and amounts paid to independent advertising 
agencies. Q also incurs costs to run these advertisements in the 
various media for which they were developed.
    (ii) The advertising costs are not chargeable to capital account 
under paragraph (f)(3) of this section (relating to costs incurred 
for covenants not to compete, rights granted by governmental units, 
and contracts for the use of section 197 intangibles) and are 
currently deductible as ordinary and necessary expenses under 
section 162. Accordingly, under paragraph (a)(3) of this section, 
section 197 does not apply to these costs.
    Example 2. Computer software. (i) X purchases all of the assets 
of an existing trade or business from Y. One of the assets acquired 
is all of Y's rights in certain computer software previously used by 
Y under the terms of a nonexclusive license from the software 
developer. The software was developed for use by manufacturers to 
maintain a comprehensive accounting system, including general and 
subsidiary ledgers, payroll, accounts receivable and payable, cash 
receipts and disbursements, fixed asset accounting, and inventory 
cost accounting and controls. The developer modified the software 
for use by Y at a cost of $1,000 and Y made additional modifications 
at a cost of $500. The developer does not maintain wholesale or 
retail outlets but markets the software directly to ultimate users. 
Y's license of the software is limited to an entity that is actively 
engaged in business as a manufacturer.
    (ii) Notwithstanding these limitations, the software is 
considered to be readily available to the general public for 
purposes of paragraph (c)(4)(i) of this section. In addition, the 
software is not substantially modified because the cost of the 
modifications by the developer and Y to the version of the software 
that is readily available to the general public does not exceed 
$2,000. Accordingly, the software is not a section 197 intangible.
    Example 3. Acquisition of software for internal use. (i) B, the 
owner and operator of a worldwide package-delivery service, 
purchases from S all rights to software developed by S. The software 
will be used by B for the sole purpose of improving its package-
tracking operations. B does not purchase any other assets in the 
transaction or any related transaction.
    (ii) Because B acquired the software solely for internal use, it 
is disregarded in determining for purposes of paragraph (c)(4)(ii) 
of this section whether the assets acquired in the transaction or 
series of related transactions constitute a trade or business or 
substantial portion thereof. Since no other assets were acquired, 
the software is not acquired as part of a purchase of a trade or 
business and under paragraph (c)(4)(ii) of this section is not a 
section 197 intangible.
    Example 4. Governmental rights of fixed duration. (i) City M 
operates a municipal water system. In order to induce X to locate a 
new manufacturing business in the city, M grants X the right to 
purchase water for 16 years at a specified price.
    (ii) The right granted by M is a right to receive tangible 
property or services described in section 197(e)(4)(B) and paragraph 
(c)(6) of this section and, thus, is not a section 197 intangible. 
This exclusion applies even though the right does not qualify for 
exclusion as a right of fixed duration or amount under section 
197(e)(4)(D) and paragraph (c)(13) of this section because the 
duration exceeds 15 years and the right is not fixed as to amount. 
It is also immaterial that the right would not qualify for exclusion 
as a self-created intangible under section 197(c)(2) and paragraph 
(d)(2) of this section because it is granted by a governmental unit.
    Example 5. Separate acquisition of franchise. (i) S is a 
franchiser of retail outlets for specialty coffees. G enters into a 
franchise agreement (within the meaning of section 1253(b)(1)) with 
S pursuant to which G is permitted to acquire and operate a store 
using the S trademark and trade name at the location specified in 
the agreement. G agrees to pay S $100,000 upon execution of the 
agreement and also agrees to pay, throughout the term of the 
franchise, additional amounts that are deductible under section 
1253(d)(1). The agreement contains detailed specifications for the 
construction and operation of the business, but G is not required to 
purchase from S any of the materials necessary to construct the 
improvements at the location specified in the franchise agreement.
    (ii) The franchise is a section 197 intangible within the 
meaning of paragraph (b)(10) of this section. The franchise does not 
qualify for the exclusion relating to self-created intangibles 
described in section 197(c)(2) and paragraph (d)(2) of this section 
because the franchise is described in section 197(d)(1)(F). In 
addition, because the acquisition of the franchise constitutes the 
acquisition of an interest in a trade or business or a substantial 
portion thereof, the franchise may not be excluded under section 
197(e)(4). Thus, the franchise is an amortizable section 197 
intangible, the basis of which must be recovered over a 15-year 
period. However, the amounts that are deductible under section 
1253(d)(1) are not subject to the provisions of section 197 by 
reason of section 197(f)(4)(C) and paragraph (b)(10)(ii) of this 
section.
    Example 6. Acquisition and amortization of covenant not to 
compete. (i) As part of the acquisition of a trade or business from 
C, B and C enter into an agreement containing a covenant not to 
compete. Under this agreement, C agrees that it will not compete 
with the business acquired by B within a prescribed geographical 
territory for a period of three years after the date on which the 
business is sold to B. In exchange for this agreement, B agrees to 
pay C $90,000 per year for each year in the term of the agreement. 
The agreement further provides that, in the event of a breach by C 
of his obligations under the agreement, B may terminate the 
agreement, cease making any of the payments due thereafter, and 
pursue any other legal or equitable remedies available under 
applicable law. The amounts payable to C under the agreement are not 
contingent payments for purposes of Sec. 1.1275-4. The present fair 
market value of B's rights under the agreement is $225,000. The 
aggregate consideration paid for all assets acquired in the 
transaction (including the covenant not to compete) exceeds the sum 
of the amount of Class I assets and the aggregate fair market value 
of all Class II, Class III, Class IV, Class V, and Class VI assets 
by $50,000. See Sec. 1.338-6T(b) for rules for determining the 
assets in each class.
    (ii) Because the covenant is acquired in an applicable asset 
acquisition (within the meaning of section 1060(c)), paragraph 
(f)(4)(ii) of this section applies and the basis of B in the 
covenant is determined pursuant to section 1060(a) and the 
regulations thereunder. Under Secs. 1.1060-1T(c)(2) and 1.338-
6T(c)(1), B's basis in the covenant cannot exceed its fair market 
value. Thus, B's basis in the covenant immediately after the 
acquisition is $225,000. This basis is amortized ratably over the 
15-year period beginning on the first day of the month in which the 
agreement is entered into. Although the payments under the agreement 
($270,000) exceed the amount allocated to the covenant by $45,000, 
all of the remaining consideration ($50,000) is allocated to Class 
VII assets (goodwill and going concern value). See Secs. 1.1060-
1T(c)(2) and 1.338-6T(b).
    Example 7. Stand-alone license of technology. (i) X is a 
manufacturer of consumer goods that does business throughout the 
world through subsidiary corporations organized under the laws of 
each country in which business is conducted. X licenses to Y, its 
subsidiary organized and conducting business in Country K, all of 
the patents, formulas, designs, and know-how necessary for Y to 
manufacture the same products that X manufactures in the United 
States. Assume that the license is not considered a sale or exchange 
under the principles of section 1235. The license is for a term of 
18 years, and there are no facts to indicate that the license does 
not have a fixed duration. Y agrees to pay X a royalty equal to a 
specified, fixed percentage of the revenues obtained from selling 
products manufactured using the licensed technology. Assume that the 
royalty is reasonable and is not subject to adjustment under section 
482. The license is not entered into in connection with any other 
transaction. Y incurs capitalized costs in connection with entering 
into the license.
    (ii) The license is a contract for the use of a section 197 
intangible within the meaning of paragraph (b)(11) of this section. 
It does not qualify for the exception in section 197(e)(4)(D) and 
paragraph (c)(13) of this section (relating to rights of fixed 
duration or amecause it does not have a term of less than 15 years, 
and the other exceptions in section 197(e) and paragraph (c) of this 
section are also inapplicable. Accordingly, the license is a section 
197 intangible.
    (iii) The license is not acquired as part of a purchase of a 
trade or business. Thus, under paragraph (f)(3)(iii) of this 
section, the license will be closely scrutinized under the 
principles of section 1235 for purposes of determining whether the 
transfer is a sale or exchange and, accordingly, whether the 
payments under the license are chargeable to

[[Page 3840]]

capital account. Because the license is not a sale or exchange under 
the principles of section 1235, the royalty payments are not 
chargeable to capital account for purposes section 197. The 
capitalized costs of entering into the license are not within the 
exception under paragraph (d)(2) of this section for self-created 
intangibles, and thus are amortized under section 197.
    Example 8. License of technology and trademarks. (i) The facts 
are the same as in Example 7, except that the license also includes 
the use of the trademarks and trade names that X uses to manufacture 
and distribute its products in the United States. Assume that under 
the principles of section 1253 the transfer is not a sale or 
exchange of the trademarks and trade names or an undivided interest 
therein and that the royalty payments are described in section 
1253(d)(1)(B).
    (ii) As in Example 7, the license is a section 197 intangible. 
Although the license conveys an interest in X's trademarks and trade 
names to Y, the transfer of the interest is disregarded for purposes 
of paragraph (e)(2) of this section unless the transfer is 
considered a sale or exchange of the trademarks and trade names or 
an undivided interest therein. Accordingly, the licensing of the 
technology and the trademarks and trade names is not treated as part 
of a purchase of a trade or business under paragraph (e)(2) of this 
section.
    (iii) Because the technology license is not part of the purchase 
of a trade or business, it is treated in the manner described in 
Example 7. The royalty payments for the use of the trademarks and 
trade names are deductible under section 1253(d)(1) and, under 
section 197(f)(4)(C) and paragraph (b)(10)(ii) of this section, are 
not chargeable to capital account for purposes of section 197. The 
capitalized costs of entering into the license are treated in the 
same manner as in example 7.
    Example 9. Disguised sale. (i) The facts are the same as in 
Example 7, except that Y agrees to pay X, in addition to the 
contingent royalty, a fixed minimum royalty immediately upon 
entering into the agreement and there are sufficient facts present 
to characterize the transaction, for federal tax purposes, as a 
transfer of ownership of the intellectual property from X to Y.
    (ii) The purported license of technology is, in fact, an 
acquisition of an intangible described in section 197(d)(1)(C)(iii) 
and paragraph (b)(5) of this section (relating to know-how, etc.). 
As in Example 7, the exceptions in section 197(e) and paragraph (c) 
of this section do not apply to the transfer. Accordingly, the 
transferred property is a section 197 intangible. Y's basis in the 
transferred intangible includes the capitalized costs of entering 
into the agreement and the fixed minimum royalty payment payable at 
the time of the transfer. In addition, except to the extent that a 
portion of any payment will be treated as interest or original issue 
discount under applicable provisions of the Internal Revenue Code, 
all of the contingent payments under the purported license are 
properly chargeable to capital account for purposes of section 197 
and this section. The extent to which such payments are treated as 
payments of principal and the time at which any amount treated as a 
payment of principal is taken into account in determining basis are 
determined under the rules of Sec. 1.1275-4(c)(4) or 1.483-4(a), 
whichever is applicable. Any contingent amount that is included in 
basis after the month in which the acquisition occurs is amortized 
under the rules of paragraph (f)(2)(i) or (ii) of this section.
    Example 10. License of technology and customer list as part of 
sale of a trade or business. (i) X is a computer manufacturer that 
produces, in separate operating divisions, personal computers, 
servers, and peripheral equipment. In a transaction that is the 
purchase of a trade or business for purposes of section 197, Y (who 
is unrelated to X) purchases from X all assets of the operating 
division producing personal computers, except for certain patents 
that are also used in the division manufacturing servers and 
customer lists that are also used in the division manufacturing 
peripheral equipment. As part of the transaction, X transfers to Y 
the right to use the retained patents and customer lists solely in 
connection with the manufacture and sale of personal computers. The 
transfer agreement requires annual royalty payments contingent on 
the use of the patents and also requires a payment for each use of 
the customer list. In addition, Y incurs capitalized costs in 
connection with entering into the licenses.
    (ii) The rights to use the retained patents and customer lists 
are contracts for the use of section 197 intangibles within the 
meaning of paragraph (b)(11) of this section. The rights do not 
qualify for the exception in 197(e)(4)(D) and paragraph (c)(13) of 
this section (relating to rights of fixed duration or amount) 
because they are transferred as part of a purchase of a trade or 
business and the other exceptions in section 197(e) and paragraph 
(c) of this section are also inapplicable. Accordingly, the licenses 
are section 197 intangibles.
    (iii) Because the right to use the retained patents is described 
in paragraph (b)(11) of this section and the right is transferred as 
part of a purchase of a trade or business, the treatment of the 
royalty payments is determined under paragraph (f)(3)(ii) of this 
section. In addition, however, the retained patents are described in 
paragraph (b)(5) of this section. Thus, the annual royalty payments 
are chargeable to capital account under the general rule of 
paragraph (f)(3)(ii)(A) of this section unless Y establishes that 
the license is not a sale or exchange under the principles of 
section 1235 and the royalty payments are an arm's length 
consideration for the rights transferred. If these facts are 
established, the exception in paragraph (f)(3)(ii)(B) of this 
section applies and the royalty payments are not chargeable to 
capital account for purposes of section 197. The capitalized costs 
of entering into the license are treated in the same manner as in 
Example 7.
    (iv) The right to use the retained customer list is also 
described in paragraph (b)(11) of this section and is transferred as 
part of a purchase of a trade or business. Thus, the treatment of 
the payments for use of the customer list is also determined under 
paragraph (f)(3)(ii) of this section. The customer list, although 
described in paragraph (b)(6) of this section, is a customer-related 
information base. Thus, the exception in paragraph (f)(3)(ii)(B) of 
this section does not apply. Accordingly, payments for use of the 
list are chargeable to capital account under the general rule of 
paragraph (f)(3)(ii)(A) of this section and are amortized under 
section 197. In addition, the capitalized costs of entering into the 
contract for use of the customer list are treated in the same manner 
as in Example 7.
    Example 11. Loss disallowance rules involving related persons. 
(i) Assume that X and Y are treated as a single taxpayer for 
purposes of paragraph (g)(1) of this section. In a single 
transaction, X and Y acquired from Z all of the assets used by Z in 
a trade or business. Z had operated this business at two locations, 
and X and Y each acquired the assets used by Z at one of the 
locations. Three years after the acquisition, X sold all of the 
assets it acquired, including amortizable section 197 intangibles, 
to an unrelated purchaser. The amortizable section intangibles are 
sold at a loss of $120,000.
    (ii) Because X and Y are treated as a single taxpayer for 
purposes of the loss disallowance rules of section 197(f)(1) and 
paragraph (g)(1) of this section, X's loss on the sale of the 
amortizable section 197 intangibles is not recognized. Under 
paragraph (g)(1)(iv)(B) of this section, X's disallowed loss is 
allowed ratably, as a deduction under section 197, over the 
remainder of the 15-year period during which the intangibles would 
have been amortized, and Y may not increase the basis of the 
amortizable section 197 intangibles that it acquired from Z by the 
amount of X's disallowed loss.
    Example 12. Disposition of retained intangibles by related 
person. (i) The facts are the same as in Example 11, except that 10 
years after the acquisition of the assets by X and Y and 7 years 
after the sale of the assets by X, Y sells all of the assets 
acquired from Z, including amortizable section 197 intangibles, to 
an unrelated purchaser.
    (ii) Under paragraph (g)(1)(iv)(B) of this section, X may 
recognize, on the date of the sale by Y, any loss that has not been 
allowed as a deduction under section 197. Accordingly, X recognizes 
a loss of $50,000, the amount obtained by reducing the loss on the 
sale of the assets at the end of the third year ($120,000) by the 
amount allowed as a deduction under paragraph (g)(1)(iv)(B) of this 
section during the 7 years following the sale by X ($70,000).
    Example 13. Acquisition of an interest in partnership with no 
section 754 election. (i) A, B, and C each contribute $1,500 for 
equal shares in general partnership P. On January 1, 1998, P 
acquires as its sole asset an amortizable section 197 intangible for 
$4,500. P still holds the intangible on January 1, 2003, at which 
time the intangible has an adjusted basis to P of $3,000, and A, B, 
and C each have an adjusted basis of $1,000 in their partnership 
interests. D (who is not related to A) acquires A's interest in P 
for $1,600. No section 754 election is in effect for 2003.

[[Page 3841]]

    (ii) Because there is no change in the basis of the intangible 
under section 743(b), D merely steps into the shoes of A with 
respect to the intangible. D's proportionate share of P's adjusted 
basis in the intangible is $1,000, which continues to be amortized 
over the 10 years remaining in the original 15-year amortization 
period for the intangible.
    Example 14. Acquisition of an interest in partnership with a 
section 754 election. (i) The facts are the same as in Example 13, 
except that a section 754 election is in effect for 2003.
    (ii) Pursuant to paragraph (g)(3) of this section, for purposes 
of section 197, D is treated as if P owns two assets. D's 
proportionate share of P's adjusted basis in one asset is $1,000, 
which continues to be amortized over the 10 years remaining in the 
original 15-year amortization period. For the other asset, D's 
proportionate share of P's adjusted basis is $600 (the amount of the 
basis increase under section 743 as a result of the section 754 
election), which is amortized over a new 15-year period beginning 
January 2003. With respect to B and C, P's remaining $2,000 adjusted 
basis in the intangible continues to be amortized over the 10 years 
remaining in the original 15-year amortization period.
    Example 15. Payment to a retiring partner by partnership with a 
section 754 election. (i) The facts are the same as in Example 13, 
except that a section 754 election is in effect for 2003 and, 
instead of D acquiring A's interest in P, A retires from P. A, B, 
and C are not related to each other within the meaning of paragraph 
(h)(6) of this section. P borrows $1,600, and A receives a payment 
under section 736 from P of such amount, all of which is in exchange 
for A's interest in the intangible asset owned by P. (Assume, for 
purposes of this example, that the borrowing by P and payment of 
such funds to A does not give rise to a disguised sale of A's 
partnership interest under section 707(a)(2)(B).) P makes a positive 
basis adjustment of $600 with respect to the section 197 intangible 
under section 734(b).
    (ii) Pursuant to paragraph (g)(3) of this section, because of 
the section 734 adjustment, P is treated as having two amortizable 
section 197 intangibles, one with a basis of $3,000 and a remaining 
amortization period of 10 years and the other with a basis of $600 
and a new amortization period of 15 years.
    Example 16. Termination of partnership under section 
708(b)(1)(B). (i) A and B are partners with equal shares in the 
capital and profits of general partnership P. P's only asset is an 
amortizable section 197 intangible, which P had acquired on January 
1, 1995. On January 1, 2000, the asset had a fair market value of 
$100 and a basis to P of $50. On that date, A sells his entire 
partnership interest in P to C, who is unrelated to A, for $50. At 
the time of the sale, the basis of each of A and B in their 
respective partnership interests is $25.
    (ii) The sale causes a termination of P under section 
708(b)(1)(B). Under section 708, the transaction is treated as if P 
transfers its sole asset to a new partnership in exchange for the 
assumption of its liabilities and the receipt of all of the 
interests in the new partnership. Immediately thereafter, P is 
treated as if it is liquidated, with B and C each receiving their 
proportionate share of the interests in the new partnership. The 
contribution by P of its asset to the new partnership is governed by 
section 721, and the liquidating distributions by P of the interests 
in the new partnership are governed by section 731. C does not 
realize a basis adjustment under section 743 with respect to the 
amortizable section 197 intangible unless P had a section 754 
election in effect for its taxable year in which the transfer of the 
partnership interest to C occurred or the taxable year in which the 
deemed liquidation of P occurred.
    (iii) Under section 197, if P had a section 754 election in 
effect, C is treated as if the new partnership had acquired two 
assets from P immediately preceding its termination. Even though the 
adjusted basis of the new partnership in the two assets is 
determined solely under section 723, because the transfer of assets 
is a transaction described in section 721, the application of 
sections 743(b) and 754 to P immediately before its termination 
causes P to be treated as if it held two assets for purposes of 
section 197. See paragraph (g)(3) of this section. B's and C's 
proportionate share of the new partnership's adjusted basis is $25 
each in one asset, which continues to be amortized over the 10 years 
remaining in the original 15-year amortization period. For the other 
asset, C's proportionate share of the new partnership's adjusted 
basis is $25 (the amount of the basis increase resulting from the 
application of section 743 to the sale or exchange by A of the 
interest in P), which is amortized over a new 15-year period 
beginning in January 2000.
    (iv) If P did not have a section 754 election in effect for its 
taxable year in which the sale of the partnership interest by A to C 
occurred or the taxable year in which the deemed liquidation of P 
occurred, the adjusted basis of the new partnership in the 
amortizable section 197 intangible is determined solely under 
section 723, because the transfer is a transaction described in 
section 721, and P does not have a basis increase in the intangible. 
Under section 197(f)(2) and paragraph (g)(2)(ii) of this section, 
the new partnership continues to amortize the intangible over the 10 
years remaining in the original 15-year amortization period. No 
additional amortization is allowable with respect to this asset.
    Example 17. Disguised sale to partnership. (i) E and F are 
individuals who are unrelated to each other within the meaning of 
paragraph (h)(6) of this section. E has been engaged in the active 
conduct of a trade or business as a sole proprietor since 1990. E 
and F form EF Partnership. E transfers all of the assets of the 
business, having a fair market value of $100, to EF, and F transfers 
$40 of cash to EF. E receives a 60 percent interest in EF and the 
$40 of cash contributed by F, and F receives a 40 percent interest 
in EF, under circumstances in which the transfer by E is partially 
treated as a sale of property to EF under Sec. 1.707-3(b).
    (ii) Under Sec. 1.707-3(a)(1), the transaction is treated as if 
E had sold to EF a 40 percent interest in each asset for $40 and 
contributed the remaining 60 percent interest in each asset to EF in 
exchange solely for an interest in EF. Because E and EF are related 
persons within the meaning of paragraph (h)(6) of this section, no 
portion of any transferred section 197(f)(9) intangible that E held 
during the transition period (as defined in paragraph (h)(4) of this 
section) is an amortizable section 197 intangible pursuant to 
paragraph (h)(2) of this section. Section 197(f)(9)(F) and paragraph 
(g)(3) of this section do not apply to any portion of the section 
197 intangible in the hands of EF because the basis of EF in these 
assets was not increased under any of sections 732, 734, or 743.
    Example 18. Acquisition by related person in nonrecognition 
transaction. (i) A owns a nonamortizable intangible that A acquired 
in 1990. In 2000, A sells a one-half interest in the intangible to B 
for cash. Immediately after the sale, A and B, who are unrelated to 
each other, form partnership P as equal partners. A and B each 
contribute their one-half interest in the intangible to P.
    (ii) P has a transferred basis in the intangible from A and B 
under section 723. The nonrecognition transfer rule under paragraph 
(g)(2)(ii) of this section applies to A's transfer of its one-half 
interest in the intangible to P, and consequently P steps into A's 
shoes with respect to A's nonamortizable transferred basis. The 
anti-churning rules of paragraph (h) of this section apply to B's 
transfer of its one-half interest in the intangible to P, because A, 
who is related to P under paragraph (h)(6) of this section 
immediately after the series of transactions in which the intangible 
was acquired by P, held B's one-half interest in the intangible 
during the transition period. Pursuant to paragraph (h)(10) of this 
section, these rules apply to B's transfer of its one-half interest 
to P even though the nonrecognition transfer rule under paragraph 
(g)(2)(ii) of this section would have permitted P to step into B's 
shoes with respect to B's otherwise amortizable basis. Therefore, 
P's entire basis in the intangible is nonamortizable. However, if A 
(not B) elects to recognize gain under paragraph (h)(9) of this 
section on the transfer of each of the one-half interests in the 
intangible to B and P, then the intangible would be amortizable by P 
to the extent provided in section 197(f)(9)(B) and paragraph (h)(9) 
of this section.
    Example 19. Acquisition of partnership interest following 
formation of partnership. (i) The facts are the same as in Example 
18 except that, in 2000, A formed P with an affiliate, S, and 
contributed the intangible to the partnership and except that in a 
subsequent year, in a transaction that is properly characterized as 
a sale of a partnership interest for Federal tax purposes, B 
purchases a 50 percent interest in P from A. P has a section 754 
election in effect and holds no assets other than the intangible and 
cash.
    (ii) For the reasons set forth in Example 16 (iii), B is treated 
as if P owns two assets. B's proportionate share of P's adjusted 
basis in one asset is the same as A's proportionate share of P's 
adjusted basis in that asset, which is not amortizable under section 
197. For the other asset, B's proportionate share of the remaining 
adjusted basis of P is amortized over a new 15-year period.

[[Page 3842]]

    Example 20. Acquisition by related corporation in nonrecognition 
transaction. (i) The facts are the same as Example 18, except that A 
and B form corporation P as equal owners.
    (ii) P has a transferred basis in the intangible from A and B 
under section 362. Pursuant to paragraph (h)(10) of this section, 
the application of the nonrecognition transfer rule under paragraph 
(g)(2)(ii) of this section and the anti-churning rules of paragraph 
(h) of this section to the facts of this Example 18 is the same as 
in Example 16. Thus, P's entire basis in the intangible is 
nonamortizable.
    Example 21. Acquisition from corporation related to purchaser 
through remote indirect interest. (i) X, Y, and Z are each 
corporations that have only one class of issued and outstanding 
stock. X owns 25 percent of the stock of Y and Y owns 25 percent of 
the outstanding stock of Z. No other shareholder of any of these 
corporations is related to any other shareholder or to any of the 
corporations. On June 30, 2000, X purchases from Z section 197(f)(9) 
intangibles that Z owned during the transition period (as defined in 
paragraph (h)(4) of this section).
    (ii) Pursuant to paragraph (h)(6)(iv)(B) of this section, the 
beneficial ownership interest of X in Z is 6.25 percent, determined 
by treating X as if it owned a proportionate (25 percent) interest 
in the stock of Z that is actually owned by Y. Thus, even though X 
is related to Y and Y is related to Z, X and Z are not considered to 
be related for purposes of the anti-churning rules of section 197.
    Example 22. Gain recognition election. (i) B owns 25 percent of 
the stock of S, a corporation that uses the calendar year as its 
taxable year. No other shareholder of B or S is related to each 
other. S is not a member of a controlled group of corporations 
within the meaning of section 1563(a). S has section 197(f)(9) 
intangibles that it owned during the transition period. S has a 
basis of $25,000 in the intangibles. In 2001, S sells these 
intangibles to B for $75,000. S recognizes a gain of $50,000 on the 
sale and has no other items of income, deduction, gain, or loss for 
the year, except that S also has a net operating loss of $20,000 
from prior years that it would otherwise be entitled to use in 2001 
pursuant to section 172(b). S makes a valid gain recognition 
election pursuant to section 197(f)(9)(B) and paragraph (h)(9) of 
this section. In 2001, the highest marginal tax rate applicable to S 
is 35 percent. But for the election, all of S's taxable income would 
be taxed at a rate of 15 percent.
    (ii) If the gain recognition election had not been made, S would 
have taxable income of $30,000 for 2001 and a tax liability of 
$4,500. If the gain were not taken into account, S would have no tax 
liability for the taxable year. Thus, the amount of tax (other than 
the tax imposed under paragraph (h)(9) of this section) imposed on 
the gain is also $4,500. The gain on the disposition multiplied by 
the highest marginal tax rate is $17,500 ($50,000  x  .35). 
Accordingly, S's tax liability for the year is $4,500 plus an 
additional tax under paragraph (h)(9) of this section of $13,000 
($17,500--$4,500).
    (iii) Pursuant to paragraph (h)(9)(x)(A) of this section, S 
determines the amount of its net operating loss deduction in 
subsequent years without regard to the gain recognized on the sale 
of the section 197 intangible to B. Accordingly, the entire $20,000 
net operating loss deduction that would have been available in 2001 
but for the gain recognition election may be used in 2002, subject 
to the limitations of section 172.
    (iv) B has a basis of $75,000 in the section 197(f)(9) 
intangibles acquired from S. As the result of the gain recognition 
election by S, B may amortize $50,000 of its basis under section 
197. Under paragraph (h)(9)(ii) of this section, the remaining basis 
does not qualify for the gain-recognition exception and may not be 
amortized by B.
    Example 23. Section 338 election. (i) Corporation P makes a 
qualified stock purchase of the stock of T corporation from two 
shareholders in July 2000, and a section 338 election is made by P. 
No shareholder of either T or P owns stock in both of these 
corporations, and no other shareholder is related to any other 
shareholder of either corporation.
    (ii) Pursuant to paragraph (h)(8) of this section, in the case 
of a qualified stock purchase that is treated as a deemed sale and 
purchase of assets pursuant to section 338, the corporation treated 
as purchasing assets as a result of an election thereunder (new 
target) is not considered the person that held or used the assets 
during any period in which the assets were held or used by the 
corporation treated as selling the assets (old target). Because 
there are no relationships described in paragraph (h)(6) of this 
section among the parties to the transaction, any nonamortizable 
section 197(f)(9) intangible held by old target is an amortizable 
section 197 intangible in the hands of new target.
    (iii) Assume the same facts as set forth in paragraph (i) of 
this Example 23, except that one of the selling shareholders is an 
individual who owns 25 percent of the total value of the stock of 
each of the T and P corporation.
    (iv) Old target and new target (as these terms are defined in 
Sec. 1.338-1(c)(13)) are members of a controlled group of 
corporations under section 267(b)(3), as modified by section 
197(f)(9)(C)(i), and any nonamortizable section 197(f)(9) intangible 
held by old target is not an amortizable section 197 intangible in 
the hands of new target. However, a gain recognition election under 
paragraph (h)(9) of this section may be made with respect to this 
transaction.
    Example 24. Relationship created as part of public offering. (i) 
On January 1, 2001, Corporation X engages in a series of related 
transactions to discontinue its involvement in one line of business. 
X forms a new corporation, Y, with a nominal amount of cash. Shortly 
thereafter, X transfers all the stock of its subsidiary conducting 
the unwanted business (Target) to Y in exchange for 100 shares of Y 
common stock and a Y promissory note. Target owns a nonamortizable 
section 197(f)(9) intangible. Prior to January 1, 2001, X and an 
underwriter (U) had entered into a binding agreement pursuant to 
which U would purchase 85 shares of Y common stock from X and then 
sell those shares in a public offering. On January 6, 2001, the 
public offering closes. X and Y make a section 338(h)(10) election 
for Target.
    (ii) Pursuant to paragraph (h)(8) of this section, in the case 
of a qualified stock purchase that is treated as a deemed sale and 
purchase of assets pursuant to section 338, the corporation treated 
as purchasing assets as a result of an election thereunder (new 
target) is not considered the person that held or used the assets 
during any period in which the assets were held or used by the 
corporation treated as selling the assets (old target). Further, for 
purposes of determining whether the nonamortizable section 197(f)(9) 
intangible is acquired by new target from a related person, because 
the transactions are a series of related transactions, the 
relationship between old target and new target must be tested 
immediately before the first transaction in the series (the 
formation of Y) and immediately after the last transaction in the 
series (the sale to U and the public offering). See paragraph 
(h)(6)(ii)(B) of this section. Because there was no relationship 
between old target and new target immediately before the formation 
of Y (because the section 338 election had not been made) and only a 
15% relationship between old target and new target immediately 
after, old target is not related to new target for purposes of 
applying the anti-churning rules of paragraph (h) of this section. 
Accordingly, Target may amortize the section 197 intangible.
    Example 25. Other transfers to controlled corporations. (i) In 
2001, Corporation A transfers a section 197(f)(9) intangible that it 
held during the transition period to X, a newly formed corporation, 
in exchange for 15% of X's stock. As part of the same transaction, B 
transfers property to X in exchange for the remaining 85% of X 
stock.
    (ii) Because the acquisition of the intangible by X is part of a 
qualifying section 351 exchange, under section 197(f)(2) and 
paragraph (g)(2)(ii) of this section, X is treated in the same 
manner as the transferor of the asset. Accordingly, X may not 
amortize the intangible. If, however, at the time of the exchange, B 
has a binding commitment to sell 25 percent of the X stock to C, an 
unrelated third party, the exchange, including A's transfer of the 
section 197(f)(9) intangible, would fail to qualify as a section 351 
exchange. Because the formation of X, the transfers of property to 
X, and the sale of X stock by B are part of a series of related 
transactions, the relationship between A and X must be tested 
immediately before the first transaction in the series (the transfer 
of property to X) and immediately after the last transaction in the 
series (the sale of X stock to C). See paragraph (h)(6)(ii)(B) of 
this section. Because there was no relationship between A and X 
immediately before and only a 15% relationship immediately after, A 
is not related to X for purposes of applying the anti-churning rules 
of paragraph (h) of this section. Accordingly, X may amortize the 
section 197 intangible.
    Example 26. Relationship created as part of stock acquisition 
followed by liquidation. (i) In 2001, Partnership P purchases 100 
percent of the stock of Corporation X. P and X were not related 
prior to the acquisition. Immediately after acquiring the X stock, 
and

[[Page 3843]]

as part of a series of related transactions, P liquidates X under 
section 331. In the liquidating distribution, P receives a section 
197(f)(9) intangible that was held by X during the transition 
period.
    (ii) Because the relationship between P and X was created 
pursuant to a series of related transactions where P acquires stock 
(meeting the requirements of section 1504(a)(2)) in a fully taxable 
transaction followed by a liquidation under section 331, the 
relationship immediately after the last transaction in the series 
(the liquidation) is disregarded. See paragraph (h)(6)(iii) of this 
section. Accordingly, P is entitled to amortize the section 
197(f)(9) intangible.
    Example 27. Section 743(b) adjustment with no change in user. 
(i) On January 1, 2001, A forms a partnership (PRS) with B in which 
A owns a 60-percent, and B owns a 40-percent, interest in profits 
and capital. A contributes a nonamortizable section 197(f)(9) 
intangible with a value of $80 and an adjusted basis of $0 to PRS in 
exchange for its PRS interest and B contributes $120 cash. At the 
time of the contribution, PRS licenses the section 197(f)(9) 
intangible to A. On February 1, 2001, A sells its entire interest in 
PRS to C, an unrelated person, for $80. PRS has a section 754 
election in effect.
    (ii) The section 197(f)(9) intangible contributed to PRS by A is 
not amortizable in the hands of PRS. Pursuant to section (g)(2)(ii) 
of this section, PRS steps into the shoes of A with respect to A's 
nonamortizable transferred basis in the intangible.
    (iii) When A sells the PRS interest to C, C will have a basis 
adjustment in the PRS assets under section 743(b) equal to $80. The 
entire basis adjustment will be allocated to the intangible because 
the only other asset held by PRS is cash. Ordinarily, under 
paragraph (h)(12)(v) of this section, the anti-churning rules will 
not apply to an increase in the basis of partnership property under 
section 743(b) if the person acquiring the partnership interest is 
not related to the person transferring the partnership interest. 
However, A is an anti-churning partner under paragraph 
(h)(12)(vi)(B)(3) of this section. Because A remains a user of the 
section 197(f)(9) intangible after the transfer to C, paragraph 
(h)(12)(vi)(A) of this section will cause the anti-churning rules to 
apply to the entire basis adjustment under section 743(b).

    (l) Effective dates--(1) In general. This section applies to 
property acquired after January 25, 2000, except that paragraph (c)(13) 
of this section (exception from section 197 for separately acquired 
rights of fixed duration or amount) applies to property acquired after 
August 10, 1993 (or July 25, 1991, if a valid retroactive election has 
been made under Sec. 1.197-1T).
    (2) Application to pre-effective date acquisitions. A taxpayer may 
choose, on a transaction-by-transaction basis, to apply the provisions 
of this section and Sec. 1.167(a)-14 to property acquired after August 
10, 1993 (or July 25, 1991, if a valid retroactive election has been 
made under Sec. 1.197-1T) and on or before January 25, 2000.
    (3) Application of regulation project REG-209709-94 to pre-
effective date acquisitions. A taxpayer may rely on the provisions of 
regulation project REG-209709-94 (1997-1 C.B. 731) for property 
acquired after August 10, 1993 (or July 25, 1991, if a valid 
retroactive election has been made under Sec. 1.197-1T) and on or 
before January 25, 2000.
    (4) Change in method of accounting--(i) In general. For the first 
taxable year ending after January 25, 2000, a taxpayer that has 
acquired property to which the exception in Sec. 1.197-2(c)(13) applies 
is granted consent of the Commissioner to change its method of 
accounting for such property to comply with the provisions of this 
section and Sec. 1.167(a)-14 unless the proper treatment of such 
property is an issue under consideration (within the meaning of Rev. 
Proc. 97-27 (1997-21 IRB 10)(see Sec. 601.601(d)(2) of this chapter)) 
in an examination, before an Appeals office, or before a Federal court.
    (ii) Application to pre-effective date acquisitions. For the first 
taxable year ending after January 25, 2000, a taxpayer is granted 
consent of the Commissioner to change its method of accounting for all 
property acquired in transactions described in paragraph (l)(2) of this 
section to comply with the provisions of this section and 
Sec. 1.167(a)-14 unless the proper treatment of any such property is an 
issue under consideration (within the meaning of Rev. Proc. 97-27 
(1997-21 IRB 10)(see Sec. 601.601(d)(2) of this chapter)) in an 
examination, before an Appeals office, or before a Federal court.
    (iii) Automatic change procedures. A taxpayer changing its method 
of accounting in accordance with this paragraph (l)(4) must follow the 
automatic change in accounting method provisions of Rev. Proc. 99-49 
(1999-52 IRB 725)(see Sec. 601.601(d)(2) of this chapter) except, for 
purposes of this paragraph (l)(4), the scope limitations in section 
4.02 of Rev. Proc. 99-49 (1999-52 IRB 725) are not applicable. However, 
if the taxpayer is under examination, before an appeals office, or 
before a federal court, the taxpayer must provide a copy of the 
application to the examining agent(s), appeals officer, or counsel for 
the government, as appropriate, at the same time that it files the copy 
of the application with the National Office. The application must 
contain the name(s) and telephone number(s) of the examining agent(s), 
appeals officer, or counsel for the government, as appropriate.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 8. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


    Par. 9. In Sec. 602.101, paragraph (b) is amended by adding an 
entry to the table in numerical order to read as follows.


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                           Current  OMB
      CFR part or section identified and described          Control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.197-2.................................................       1545-1671
 
                  *        *        *        *        *
------------------------------------------------------------------------


David Mader,
Acting Deputy Commissioner of Internal Revenue.
    Approved: January 14, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-1380 Filed 1-20-00; 1:19 pm]
BILLING CODE 4830-01-U